On customers and online stores: Part 2
This is Part 2 of a mini-series on Customer Lifetime Value in ecommerce. You can read the other parts here:
Part 1: How Apple wins with CLV
Part 3: Increasing your store’s CLV and profit
Customer lifetime value in ecommerce is not interesting to look at every day.
Busy with day-to-day tasks, we often forget that, however, it is powerful enough to make or break the business.
In this article, we explain why customer lifetime value should be part of your long-term ecommerce strategy.
Why customer lifetime value impacts your business bottom line?
Customer lifetime value is basically how much people spend in your store over their entire lifespan as your customers.
There are a few ways to calculate your CLV. Probably the most practical one is the formula:
avg. order value x avg. number of orders
$ 30 AOV x 1 order on average = $ 30 CLV
But it’s way better to be
$ 50 AOV x 5 orders on average = $ 250 CLV, right?
The higher your CLV, the more loyal your customer are. Congrats! You get a steady flow of repeat purchases, people like your products and shop a lot more and your business is healthy. You’re good at customer retention.
Why is customer lifetime value so important in ecommerce?
No matter what happens after that, you pay to get the first order from a customer. It might be as huge as $100 per new customer or it can be close to $0 (and a chunk of your time if you really mastered organic social media), but there’s a cost.
You most probably lose money on that first sale. It’s one of the truths in ecommerce.
Here’s where CLV comes in. It is the difference between life and death (of a business), between success and failure.
If you strategize for the long term and work for a higher CLV, you’re essentially planning how to increase your ROI.
You’re consciously planning how to offset that initial cost of acquisition and make the most of it. Each sale to an old customer makes you more and more profitable.
It’s again simple math, really:
CLV = $ 45
CAC = $ 15
You make $ 30
But if
CLV = $ 105
CAC = $ 15
You make $ 90
Customer retention isn’t free, you’d say, and you’re right but it’s about 5 times cheaper to retain a customer than to acquire them.
It requires you not to pay for ads, for example, but primarily to deliver customer satisfaction so people get hooked on your brand.
This is what Native, a natural deodorant brand, did and grew from 0 to $100 million within 3 years of launch. Their customers are deeply engaged in the creation of the product and sales to returning customers account for as much as 50% of all sales.
Native was even in the position to turn down large retailers that wanted to sell their products nationwide because the founder Moiz Ali didn’t want to break the extraordinary customer relationships he’d built.
He’s totally focused on repeat business and CLV, which drives his exponential growth.
Read the Native case study here
Why you should start optimizing your store for CLV today?
CLV is not just another ecommerce metric to neglect. You probably don’t check how it’s moving every day and that’s normal — it’s a metric that runs over months and even years.
But it’s important exactly because it’s long-term and focuses your business on growth and financial health.
CLV measures your client relationship management
The weaker your client relationships are, the less repeat business you get. When people are not engaged with a brand, not cared for and left to slip away, you cannot expect high CLV.
To increase customer retention and loyalty, you should understand your customers better, adapt to their buying behavior and tailor your marketing to proactively engage them in ways they enjoy.
CLV shows if your products are good
If your CLV is low, your buyers either do not understand how to properly use the product or it doesn’t work the way you market it. In both cases you have dissatisfied customers who won’t buy again.
So either gather feedback and improve to deliver a product they want or find the right audience for the product you have.
CLV helps you budget for marketing
When you know how much you get from a customer, it’s easy to draw a line what an affordable cost of acquisition is. No more shooting in the dark or — worse — eating our own margins.
It’s also really cool that with increasing CLV, you’ll be able to pay more for acquisition if you need to expand into new markets or segments.
CLV makes you discover your most valuable customers and cater to them
To get more repeat buyers, you have to first know what they’re like. That’s why you’ll dig into your CRM and find the people with most orders and most money spent.
By gearing the shopping experience, offers and all towards those profitable customers, you’ll be attracting more like them. Also, you’ll be able to prioritize customer support efforts and let a “bad” customer go when it’s clear they’re not in that group.
CLV stimulates healthy margins
Loyalty doesn’t come from discounts. In fact, customers acquired with discounts have a low CLV. But if you work on your brand image, you’ll get customers hooked on your products for their quality, values and story, and paying the full price.
Thus, you won’t have to give away discounts to stimulate repeat orders and your margins will stay larger in an industry plagued by low profitability and endless devaluing of brands.
CLV gives you cash for reinvesting and growth
The problem with many small ecom businesses is that they cannot afford to develop moe products and improve their operations due to lack of cash. Only if you could hire help or order those special delivery boxes!
As your profitability grows with CLV, you’ll find yourself in a much better financial position to reinvest back in the business and deal with whatever’s been blocking your growth.
Viable businesses have high CLV
When everything’s alright with the products and service, customers are happy and you’re doing well financially, the business is alive and kicking. Good businesses do not struggle to keep customers around.
