On customers and online stores: Part 1
This is Part 1 of a mini-series on Customer Lifetime Value in ecommerce. You can read the other parts here:
Part 2: CLV and the bottom line
Part 3: Increasing your store’s CLV and profit
In order to talk about LTV, let’s take a look at the bigger picture first.
eCommerce is obviously booming. More and more people are jumping on the online retail wagon and this is all good because it pushes the whole industry forward.
But there’s the downside that almost no-one talks about, although everybody’s struggling with it.
It’s the fact that more and more businesses are fighting for the customer. Which leads to one thing — increased CAC (customer acquisition costs).
It’s obvious that it’s never been more expensive to acquire a customer. But the reality is it’s never going to be cheaper to acquire one, either.
High CAC is not the issue, though. Low LTV is.
Customer LTV (lifetime value) is what customers spend on average in your store.
Let’s say Jane placed two orders on my online store — one for $10 and another for $15. Her LTV is $25.
If Jane is happy and I’ve designed my business for higher LTV and retention, Jane can easily spend another $25 on my products, which will pump her LTV up to $50.
Now, if I optimize my business only for acquisition and AOV, I can probably afford to pay $5 to acquire Jane. And I’ll make only $5 out of her $10 order.
It’s not bad, but it’ll require massive optimization to be able to acquire customers like Jane that would only cost me $5.
However, if I know that Jane is probably going to spend $50 in my store in the next 12–18 months, I can easily afford to lose a few bucks on her first order.
Rule of thumb is that CAC should be between 1/5 and 1/3 of the LTV.
So depending on how profitable I want to be, I can invest anywhere between $10 and $16 to acquire Jane.
And that changes a lot.
Now, if I optimize only for Jane’s one-time business, I’ll make $5.
If I optimize for LTV, I’ll make anywhere between $40 and $34.
It’ll also make me more competitive in attracting people like Jane to my business. If I can afford to spend 2x or 3x what I’m currently spending to acquire customers, I can increase the reach (acquire more customers) and increase the quality of the leads (leads that are more expensive to acquire are usually of higher quality).
And this can save my business and actually help me grow way more than I’m currently growing. It’ll turn my eCommerce into a predictable growth machine. Which is way different than constantly fighting to keep marketing costs low so my business makes any profit.
Your CAC is not high. Your LTV is low.
What you make from a client doesn’t justify the cost.
Optimise for it and prepare to grow.
The logical question is how?
That really depends on your business. It really depends on what you sell, who you sell it to and if you own the product or you’re a reseller.
Let’s look at Apple. They know a thing or two about LTV
Imagine I’m a reseller of Apple products. The average profit margin of Apple products is 8%. Yep, that’s correct! Every flashy store that sells Apple products (with all the investments they need to make) makes 8% on average.
Yet, somehow those stores manage to make decent profits and keep the business running. How?
They optimise for LTV.
The average reseller knows that it’s not just about your Mac. Or iPad. It’s about the experience and your loyalty. And the customer’s trust in your business.
Most resellers lose money on every Mac, iPhone or iPad they sell.
However, Apple gives resellers a 12–15% profit margin on accessories like headphones, phone cases, cables, chargers and so on. Those products are cross-sold after the first purchase.
And if you work with laptop bag brands and alternative phone case brands approved by Apple, you can easily get a margin of 15%-40%.
Here’s the typical experience of a first-time Apple buyer, Tom:
Day 0. Tom buys a new iPad Mini. Reseller makes $30. The customer experience is top-notch and Tom is very satisfied.
Day 7. Tom drops his iPad for the first time. He realizes that he needs to buy an iPad case to protect his recent purchase. As he already had an amazing experience with the reseller, Tom goes back and the reseller makes additional $8–12.
If the sales rep is good, he can also upsell Tom with a screen protector — they usually cost around $20 and their profit margin is mind-blowing. Add up $15 more to the customer LTV.
Day 35. Tom loses the headphones. Reseller makes additional $5 — $30 depending on what he buys.
Day 45. Tom decides to put smart bulbs in his house to control with his iPad. Reseller gets additional $15–25 for a set of Philips Hue.
Day 90. Tom decides to buy a home speaker that works with his iPad. Reseller makes additional $20–80 depending on which brand/ model he picks.
And it goes on and on. A single customer goes from $30 profit for the reseller up to $100–180 in the first 90 days.
And if the customer is satisfied and if the reseller has the right products to keep the customer around, he can easily make $1,000 out of this customer in the next few years.
What’s your LTV?
Does your LTV justify your marketing costs?
Check how much you earn on average and by channels. If it’s a good cost-to-earnings ratio, you can afford to have one-time buyers.
But if not, you’re actually leaking money even as you’re keeping marketing costs down.
It turns out it’s a better strategy to spend more on acquiring your customers and put the focus on retention.
If you’re up for the challenge, products like Metrilo that are designed to help you understand and increase your customer LTV are around to help you on this wonderful journey of growing your own eCommerce business.
This article first appeared on www.metrilo.com/blog.
