Calculating your customer acquisition budget based on repeat customer purchases

Recently Matt, a Repeat Customer Insights customer, emailed asking how to figure out a rough acquisition costs budget.

I wanted to ask if you have any ideas around Cost of Acquisition - or any softwares that help with dialing it in. There's so much to know if your current software, but then being able to get back out, start advertising, and being able to know what's an 'acceptable' cost of acquisition given the repeat purchase rates + LTV would be invaluable!

Figuring out allowable acquisition costs is complicated since every store is different and has different costs, etc.

Repeat Customer Insights deals with repeat customers so acquisition analysis is outside what it does but thinking about it a bit, you might be able to use this as rule-of-thumb. It calculates how much profit the first and second order would contribute based on the likelihood of the second order.

max acquisition cost = (Average Order Value for 1st orders * profit margin) + 
                       (Repeat Purchase Rate * Average Order Value * Net profit margin)

For example with round numbers:

• AOV (first order) is $100
• AOV (overall) is $100
• Net profit margin is 10%
• Repeat Purchase Rate 25%

= (100 * 0.10) + (0.25 * 100 * 0.10)
= (10) + (2.5)
= $12.50 acquisition cost.

That's $10 from first order, $2.50 for second order, and it doesn't account for any later orders (those will just count as extra profit).

It won't be a precise measurement but should get you in the ballpark for profitability.

(This can also be combined with your conversion rate to figure out your max Cost Per Click)

Average Order Value and Repeat Purchase Rate is in Repeat Customer Insights (Store Analysis and Order Sequencing for the 1st order AOV). Net profit margin isn't something the app measures but you should be able to estimate that from your business financials.

Eric Davis