The Math and Art of Optimizing Customer Lifetime Value
Successful eCommerce entrepreneurs understand one important thing: your customers are your greatest asset. Of course, incoming sales should always be celebrated but the real value is in the potential to continue earning from that one customer for a lifetime.
While it’s important to know your eCommerce website’s metrics and KPIs—bounce rates, click through rates, conversion rates, average order value, add to cart ratio—the best eCommerce business owners look beyond short term goals. Instead, they focus on retaining loyal customers and their lifetime value.
In this video session, Liat Karpel Gurwicz, Head of eCommerce Marketing, Wix, talks us through The Math and Art of Optimizing Customer Lifetime Value.
Watch the full video here:
Read on for an overview of the session’s most important points:
What is customer lifetime value (LTV)?
Customer lifetime value or LTV is the total estimated revenue that you’ll earn from a customer, or customer segment, over a specific amount of time. (Their lifetime as customers).
Why is customer lifetime value important?
“By focusing on returning customers and their lifetime value, you're providing your business with a North star for growing profits” - Liat Karpel Gurwicz, Head of eCommerce Marketing, Wix.
Nurturing the loyal customers who actively spend money with your business is key to building a successful eCommerce business.
As eCommerce merchants we invest money, time and resources into acquiring new customers. By calculating LTV - how much money one customer will spend with us in their lifetime - we can determine how much we should budget to acquire new customers and how much we should spend to retain the ones we already have. By doing the math you can quickly determine if you’re spending too much to keep a customer and if so, can redirect your spend elsewhere.
Ultimately, increasing lifetime value will increase profits. You get an accurate gauge on what a customer is actually worth and that enables you to structure your marketing investment to maximize your profit margin.
The Math: Calculating customer lifetime value
There are multiple methods for calculating customer lifetime value, and some of these models come with challenges, but ultimately it’s up to you to calculate what works best for your business.
In this part of the session, Karpel Gurwicz takes us step-by-step through calculating:
Customer lifetime value. Estimated revenue that you’ll earn from a customer, or customer segment, over a specific amount of time.
Return on investment ratio. How much you earn with every customer you're acquiring. In order to calculate this, you’ll also need to take a look at your customer acquisition cost: how much it costs you to acquire a customer.
Cohort based customer value. The value brought in by a group of customers that started buying your products during the same period of time. For customer value calculations to be actionable, you need to know how quickly you're going to obtain that value over a certain period of time.
It’s worth noting that identifying customers by cookies might be less accurate and sensitive than identifying customers via a login mechanism. So please take that into account when you're calculating your lifetime value.
The Art: Increasing customer lifetime value
“Everything that we do to try and optimize those sales and get customers to buy more has to drill down into actually providing them value.”
- Liat Karpel Gurwicz, Head of eCommerce Marketing, Wix.
Increasing customer lifetime value is indeed an art. When trying to increase it you’ll need to look at the areas of your business you want it to impact. You might want to increase the average order value, drive repeat sales, or simply build customer relations. but ultimately you need to focus on providing value throughout the customer journey.
In this part of the session, Karpel Gurwicz outlines the importance of knowing your customers, the effective sales strategies we need to use to target them, and gives us examples of successful users who’ve done just that.
Upselling. Encouraging customers to buy a comparable superior more expensive product than the one they're actually considering.
Cross-selling. Encouraging customers to buy related or complementary products, in addition to what they're already buying.
Bundling. Taking a main product, bundling it with related products and selling all of those items for a discount.
Subscriptions. Adding a recurring payment model to your business which helps to create a steady income stream from fans of your product.
Gift cards. Improve cash flow and generate immediate revenue with the option to purchase gift cards. You get that revenue, whether they're used or not.
Live chat. This can be an invaluable way to connect with customers, in real time, at key stages of their shopping journey.
Email marketing. Stay front and center in the customer’s mind with regular emails offering discounts or sharing new product announcements.
Automated emails. Encourage customers to return to your site using automations like abandoned cart recovery, post purchase thank you emails or sending discount codes to new subscribers.
Loyalty programs. Motivate customers to keep engaging with your brand and reward them through loyalty based third-party apps like Smile.io.
The challenges of LTV models
Customer lifetime value is the cornerstone for gauging customer worth and building profitability.
In the short term, you use it for strategizing how to bring relevant shoppers, cover acquisition costs and return marketing investment as quickly as possible so you can re-invest that money and bring more customers. In the long term, you use it to grow customer value and revenues to build your business and keep optimizing and increasing profitability.
But it is important to note that LTV models also have challenges: customer acquisition costs, conversion rates, and retention rates (or churn rates) will all change over time and are not constant.
For customer value calculations to be actionable, you need to know how quickly you obtain that value over a certain time period.
That's why at Wix, we don't use LTV models at all when planning and optimizing our marketing investments for customer acquisition.
We use a different methodology called TROI - Time to Return On Investment. We define this metric as the time it takes to collect dollars from new premium subscriptions acquired in a cohort to equal dollars spent on direct acquisition marketing costs in the same cohort.
Wix is a SaaS platform with over 200 million users worldwide, so our business is a little different than average eCommerce brands. We believe that by focusing on great product and conversion, consistent behavior of users over the long term results in increasing monetization of user cohorts due to cumulative collections from these users. We also believe that this results in more efficient marketing because we invest in one-time marketing and earn ongoing collections.
Whether you are measuring LTV or TROI remember: your customers are your greatest asset. Keep in mind the potential to continue earning from your customers for a lifetime and make sure that everything you’re doing taps back into how you can provide value and optimize for that.
Take the time to watch this insightful and in-depth session on LTV. Press pause, take notes and rewatch if needed. There’s a lot to take in but mastering these calculations and strategies will help take your business to the next level.
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Marketing Writer, Wix eCommerce
Geraldine is a marketing writer for Wix eCommerce. She uses her broad experience in journalism, publishing, public relations and marketing to create compelling content and loves hearing user success stories.