The document discusses key concepts for e-commerce business unit economics including: Customer Acquisition Cost (CAC), which is the fully loaded average cost to acquire a new customer. Contribution Margin (CM) is the revenue from a customer minus variable costs excluding CAC. Customer Lifetime Value (CLV) is the total revenue generated by a customer over their lifetime with a business. The document provides guidance on optimizing these metrics including lowering CAC through organic growth and conversion rate improvements, increasing CLV by getting customers to make more and larger purchases long term, and increasing CM by improving product margins and lowering operational costs. It also stresses the importance of cash flow and profitability over growth metrics like return on investment.

1. Mauria Finley, CEO and
Founder
@mauriafinley
E-Commerce Math

2. My Background
Commerce
Community
Content
Mauria Finley @mauriafinley

3. Key Terms
CAC = Customer Acquisition Cost
CM = Contribution Margin
CLV = Customer Lifetime Value
CLC = Customer Lifetime Contribution
Fully loaded average cost to acquire a new customer
Revenue from customer during his/her tenure
Amount of contribution after all variable costs, excl. CAC
Contribution margin from customer during his/her tenure
Mauria Finley @mauriafinley

4. Unit Economics in A Good Business
Payback: Recover CAC in contribution < 1 year
Cohorts Improving
ROI Ratio: CLC > 3 X CAC
Can scale acquisition with ROI & payback ratios
Mauria Finley @mauriafinley

5. Customer Acquisition Cost (CAC)
Big leverage from:
• Organic
• Conversion
Deep analysis:
• Review & rank channels at lowest possible
level
• Watch by cohort
• Beware averages: watch top & bottom buyers
• Do attribution but avoid “double dipping”
Total Marketing $
Total New Acquired
Blended CAC
Mauria Finley @mauriafinley
=
Things to think about:
• Experiment aggressively
• A balanced portfolio might be a barbell
(different sides optimize for different things)
• Set your CAC to ROI ratio and be comfortable
spending to that
• CAC can change from early days to scaling

6. Contribution Margin (CM)
Cash In = List Price - Discount
(Product COGS)
(Shipping)
(Fulfillment: materials, packing, storage)
(Credit card processing)
(Returns)
(Inventory write-offs)
(Fraud)
(Customer care)
Excludes: 1-time CAC & fixed costs
(merchandising, dev, production, etc.)
-> Product or Gross Margin
-> Contribution Dollars Out
Basically all the variable costs
except CAC. Discounting can go into
CAC or out of CM.
Lots of costs come out of the cash
you take in!
Start with strong product margin
If not, be great at the below the line
operational costs
Generally, you can optimize the
operational costs later unless they
are your unique advantage
Mauria Finley @mauriafinley

7. Customer Lifetime Value (CLV)
Purchases per Year
X
Average order value
X
Years active
CLV: Total Revenue Dollars
Over Customer’s Lifetime
These are the levers = frequency, size
of purchase, tenure
A key decision is your tenure estimate;
relates to the nature of your service
Even with long tenure, you might want
incentives to pull dollars into the present
CLV is often better than you think (if you
have a good product)
But be wary of overestimating in the
short term (cash implications)
Mauria Finley @mauriafinley

8. Cash Payback Is Key Decision
One $50 order
$15 contribution
 CPA Threshold = $15
PAYBACK IN 1st ORDER PAYBACK IN 6 MONTHS PAYBACK IN 12 MONTHS
Two $50 orders
$30 contribution
 CPA Threshold = $30
Four $50 orders
$60 contribution
 CPA Threshold = $60
Approach to payback has HUGE implications, particularly for an early stage
startup
More aggressive => higher CPA threshold => faster growth
But also exposes more cash
Might choose to adjust other KPIs to have less payback risk
Assumptions: $50 AOV, 30% CM, purchases 4x per year
Mauria Finley @mauriafinley

9. Big Levers on Unit Economics
LOWER CAC INCREASE CLV INCREASE CM
Organic / viral
Channels
Conversion
More purchases
Higher AOV (upsell /
cross sell)
Longer active life
Better product margin
Lower costs
Mauria Finley @mauriafinley

10. You Can’t Know Everything At Once
1st PRODUCT MARKET FIT
SCALE LTV w/ BEST
ASSUMPTIONS
THEN ADD COST
OPTIMIZATION
Can you acquire?
Do they like it?
Can you scale
acquisition
Do they stay / repeat
and buy more?
CAC improvements
Improve COGs
Decrease operational
costs (ship, fulfill, CC)
YOUR UNIQUE VALUE
Vendor terms?
Quick ship?
Producing products?
Mauria Finley @mauriafinley

11. Remember Cash is King
Marketing is a BIG variable cost
And, headcount & opex add up too!
Inventory can kill you
Might balance payback & cash upfront over ROI
Be paranoid about buying mistakes (too much, wrong stuff)
Try for negative cash conversion (pay after you’re paid)
Mauria Finley @mauriafinley

12. Great Resources
Bessemer’s Top 10 Laws of E-Commerce:
http://www.bvp.com/sites/default/files/bessemer_top_10_laws_ecommerce_oct2010.pdf
Saar Gur: http://www.slideshare.net/saarsaar/why-most-startups-fail-at-acquiring-new-customers-and-
how-you-can-succeed
Jeremy Liew’s blog: http://lsvp.com/2012/06/15/how-to-estimate-lifetime-value-for-an-
ecommerce-business-sample-cohort-analysis/
Zulily’s S-1: http://www.sec.gov/Archives/edgar/data/1478484/000119312513393718/d552850ds1.htm
Mauria Finley @mauriafinley

13. Questions
Mauria Finley @mauriafinley