Sabri breaks down the unit economics that make e-commerce profitable: customer acquisition cost, lifetime value, average order value, and conversion rate. Aim for a 3:1 CAC to LTV ratio, use 30 to 90 days to test whether an offer works, and focus on AOV early to cover your ad spend on day one.
Questions this video answers
No less than 3:1 (CAC to LTV).
Within a 30–90 day period (speaker mentions 30, 60, 90 days as examples).
Roughly within the first ~90 days of launching an offer.
Chapters
Hey guys. This week on HeySubree, I'm gonna be answering 1995 UDIS question. I know that's not your real name, but it's what I'm working with right here. So you've written. Hey Sabri, can you do a video about how to measure direct marketing metrics like E commerce? What are the metrics that matter? How can I verify my business model? Cool. And great question. The metrics that you're looking for are called unit economic economics. And it's basically all the different units of economics that add up in your customer acquisition. Also on the back end, operating and cash drag in your business that's going to be able to identify whether or not you have product market fit, I. E. Do you have something that you can put $1 in and $3, $5, 10, 20, $200 comes back out of the machine? And the way that you do that is by forming a hypothesis, buying the data, then being very pragmatic with the way that you look at those numbers to see if this makes sense. Okay, so what, Realistically, when you're looking at E Commerce, there are a bunch of metrics and secondary metrics to look at to find out whether or not you have something that's got legs and it's gonna scale. That is you have product market fit and you know, in the big broad brushstrokes at the top of the pyramid, you know, you've got customer acquisition cost and, and ltv and they're the things that you kind of look at. Then you've got net margins on that to understand. You know, when some people talk about ltv, they're talking about gross lifetime profit. Some people are just talking about gross revenue. Right? You want to look at gross lifetime profit for the business, especially in E Comm. Because you have to factor in your margins on it. On a lead gen business, it's a little bit more fluid because your direct costs will change by giving a whole bunch of different things. And then you want to understand, okay, what is the relationship? What is the ratio between my customer acquisition cost to my ltv? Right. So if those numbers are positive and you know by, by positive, you're really looking at no less than a 3 to 1. When I say 3 to 1, that's if like you don't have like a real crazy back end to the business and you don't really maximize the complete value of a buyer that comes into your business, yes, it can be a lot higher. Yes, you can go break even on the front end if you really, really Understand your numbers on the back end, okay? So they're, they're the two overarching and then within that you have AOV average order value. And the reason that average order value is a very important metric is that's showing you day one cash. Okay? So when you're looking at LTV, that can be over a 12, 24, 36, five year period even, right? So when you're looking at a, you know, a three month, six months, 12 months, 24 months time period, that's where you're kind of looking at your ltv. And in terms of your aov, your average order value. The reason that's important is that's going to dictate how aggressively that you can scale and how big your cash reserves need to be. For instance, if you're got a customer acquisition cost of $50 and, and your average order value is $50, then that doesn't even factor in your margins. You're going into the hole to acquire the customer, right? And for very aggressive customer acquisition strategies, that is the way that you want to do it. That's what all the big boys do. The people that go out there and want to just suck the oxygen from a market, that is how they operate. That's why AOV is really important. Let's just say that you've got a $50 customer acquisition cost and your AOV is $25. You're going to go into the HOL, right? If you're very, very switched on, you can even operate and engineer a business model that makes money or breaks even day one or day 30 within the business, I. E. You can chuck the ad spend on a credit card at the end of the month when everything's owed, you're nothing out of pocket, you're clean, break even. And then everything else in the LTV outside of that AOVA is pure cream, pure profit, right? So they're the kind of numbers that are going to dictate whether or not your business model is a business model or it's just an expensive hobby. And then from where you've got those big boulders, then you want to reverse engineer that and back out and start to form. Other hypothesis is like looking at, okay, this is what our customer acquisition cost is, this is what our conversion rate is. Conversion rate on this traffic channel for this industry is this XYZ benchmark. You can find those details online, you can go on Facebook groups, you can see what other people are saying and then you know, okay, cool. I would have a business model if I could get my front End conversion rate to 2%. Right now it's at 0.75%. It just seems like no matter what I do, it's not going to stack up. And then you have a look at what is it within your power that you could manipulate to make it so your business model does stack up. Because it's very rare that you launch an offer and straight out the gate that thing's a winner. It's usually ruthless execution and optimization on manipulating these metrics. Conversion rate, AOV take rates, LTV payback periods, all of those kind of things that you will do and split testing. Different price points, different offers, different angles, different hooks, different audiences, different traffic channels to find out that pocket where the business model does make sense. And then using those learnings and then scaling it up and scaling it out to other traffic channels where you can make it make sense. So they're all of the things that you kind of want to be thinking about and the things that you can manipulate. But unless you can get it to, you are acquiring a customer for far less than what they make you over an extended period of time. And ideally you've got a high enough aov within a 90 day, 60 day, 30 day period that it liquidates a good amount of the customer acquisition cost. Unless you can get all of those things kind of loosely in line, you know, within the first, depending on how much you're spending on traffic, 90 days of launching an offer, then, you know, okay, I should either take this idea behind the back of the barn and shoot it and kill it and move on to something else, or hey, there is something here and I just need to, you know, make a whole bunch of iterative tests and split test a bunch of stuff to see if I can get to a place where this is indeed a business model. I hope that helps you. Hey guys, if you're enjoying these videos, please like subscribe and hit the bell button as we're dropping a video like this every other day on YouTube. And if you've got any questions, just leave a comment below with hashtag heysubree and I will do my best to get to it.
