The customer value optimization framework is an innovative approach to executing your ecommerce marketing strategy. Why? Because it forces you to see beyond clicks and visitors and put your focus on what truly matters: sales and profits.
It doesn’t matter if you get a million visitors tomorrow that don’t convert; at the end of the day, what matters is that you see more sales and higher profit margins. That’s what the customer value optimization framework is all about. With so much information abound, where do you get started implementing the customer value optimization framework for your ecommerce business?
In this article, we’ll look at the exact steps you need to take to start using the customer value optimization framework in 2021. But before we get started, let’s get clear on what it is all about.
What’s a Customer Value Optimization Framework?
Customer value optimization (CVO) is a framework marketers use to improve their customer lifetime value (CLV) by executing profitable customer acquisition and customer retention strategies.
As explained by Valentin Radu, Omniconvert’s CEO, the customer value optimization framework improves the traditional ecommerce formula by focusing not on traffic, conversions, or the average order value, but on customers, customer lifetime value (CLV), and customer acquisition costs (CAC). These three metrics can be measured the following way:
- Customers: Traffic * Conversion rate
- Customer Lifetime Value: Average order value * # of Transactions per Year * Frequency of Purchases per Year * Profit Margin
- Customer Acquisition Costs: Cost of sales and marketing / Customers
In other words, the CVO framework shifts the focus from traffic and conversions to revenue and costs, the two levers that define profitability in any business. Through the use of the CVO framework, a marketer strives to drive profitable traffic—that is, relevant traffic that converts profitably.
In the rest of the article, we will take a deep look at how an ecommerce store can successfully implement the customer value optimization cvo framework in 2021.
How to Start Implementing the Customer Value Optimization Framework for an Ecommerce Store
Step #1: Segment Your Customers to Identify Profitability Opportunities
Segmentation is one key aspect that differentiates the CVO framework from other generic approaches to digital marketing. Instead of thinking about driving as much traffic as possible at the lowest cost possible, you want to know who’s more likely to buy from you at the highest value possible, and then decide on the traffic sources and marketing tactics.
To find those people, you want to implement an RFM analysis, a technique that segments customers by their:
- Recency—that is, how recently they have purchased.
- Frequency—that is, how often they purchase.
- Monetary—that is, how much they have spent.
In an RFM analysis, you grab all your historical data to which it will assign a numeric value to each of the three attributes—recency, frequency, and monetary—and based on the behaviors displayed by your visitors, you group them in different segments. With the help of software like REVEAL, you can run an RFM analysis and segment your customers to create targeted, profitable campaigns automatically.
The highest-scoring segments will represent those visitors with the highest number of orders and highest order value. Despite their small size, these are the most profitable segments. Every segment has a unique name, such as:
- Apprentice—made from new customers
- Ex-Lovers—made from customers who have made multiple purchases in the past, but not recently
- Breakups—made from past, inactive customers
Such a behavioral approach to customer segmentation will allow you to create marketing campaigns that target each profitable segment separately, reducing your digital marketing costs and increasing your ROI.
Step #2: Research Each Segment
While you could start running targeted marketing campaigns to each of the segments you get from your RFM analysis, the CVO framework requires a much in-depth, data-driven approach. For example, you could think that the highest-scoring segments will respond positively to a sales-focused campaign—like a promotional email—yet you could find out that this displeases this segment and results in few conversions.
For this reason, you need to research each RFM group you have—at least, those with the highest number of customers—by running several qualitative research techniques. Some options you can use include:
You can also interview some of your customers personally—on-site or remotely—to uncover demographical, geographical, and psychographic information about them.
Step #3: Define your Ideal Customer Profile (ICP)
After researching your most important RFM segments, you should have a clear idea of the type of people that make up each of them. You want to take the information you have and use it to create an Ideal Customer Profile (ICP) for each segment.
An ICP will allow you to create ads and write copy that represents your valuable customers, and create an offer that’s most likely to motivate a purchase.
To define your ICP, take both the qualitative data you have acquired in the previous step with the quantitative one you already have, and start looking for patterns. Each ICP should include:
- Their demographics—e.g., age, location, gender
- Their buying habits—e.g., days and times they most often buy, devices they buy from
- Their product preferences—e.g., categories, variants, and quantities they most often buy from
- Their FUDs—i.e., their fear, uncertainties, and doubts that stop them from buying
- Their needs—i.e., any other issue or key insight that you found from your qualitative research
According to Casey Paxton, Content Marketing Specialist at Parlor.io:
“Developing a strong ICP is crucial to any marketing campaign. You need to know who you’re selling to and why, so that you can tailor the content to fit what they’re looking for. If you don’t create a clear customer persona before launching a marketing campaign, you’re going to end up wasting time, money, and resources on weak messaging that doesn’t resonate with the right folks.”
Casey recommends getting as specific as possible—instead of targeting a wide audience with a vague ICP (i.e., “engineers over the age of 25”), you should target a highly specific one (i.e., “front-end software engineers with at least five years of experience at B2B SaaS companies. That laser-focused approach will most likely convert into actual paying customers.
Step #4: Choose a Traffic Source
Your ICPs will give you valuable information that will guide your marketing decisions; where you promote your business—your traffic sources—is one of them. Your traffic sources aren’t “Google” or “guest posting,” as the former is a source—or “channel“—whereas the latter is a tactic. Your traffic sources are the mediums where you find your ICPs, who then visit your site after being offered something valuable from your company—e.g., an article, an ad.
The CVO framework values traffic sources over marketing tactics because the former is where your ICPs reside—and therefore, where you want to promote your business—whereas the latter only represents promotional methods. In other words, a marketing tactic is what gets people to visit your site; a source is where you find them.
Some popular marketing sources you can consider using are:
- Google Ads—or “paid search”
- Google search—or “organic search”
- Blogging—in your site or third-party sites
- Instagram organic content
- Instagram Ads
- Facebook Ads
Each of the seven traffic sources mentioned above has advantages and disadvantages of their own, which you need to analyze carefully. But before you make any decisions, you need to remember that the traffic source you choose must be:
- Cost-efficient—i.e., you can attract traffic from it at a cost lower than your LTV.
- Relevant—i.e., you can find your ICPs in it, which will lead to higher conversion rates.
A traffic source that meets these two criteria will help you drive traffic that will convert profitably. If a traffic source doesn’t meet one of the criteria, you will have to decide whether to keep it or optimize it.
For example, you may find that your email visitors convert well, but their costs are too high. The solution could be that you need to drive more relevant traffic to your free email opt-in offers—more on that later—or that you need to increase your email open rates and CTR, thus balancing the email subscribers’ acquisition costs.
Whatever the traffic source you choose, the CVO framework doesn’t stress so much on the tactics used, but on their acquisition costs and their value (as measured by their CLV). Once you find a cost-efficient, high-converting traffic source, you can always buy more traffic.
One suggestion to keep in mind is that you should always aim to master one traffic source at a time. As you uncover profitable and scalable channels, you can try new ones.
Step #5: Define Your Offers
It should be clear by now that the CVO framework emphasizes a strategic approach to every significant marketing decision you make; this also includes the offers you present to your visitors.
Broadly speaking, there are four offer types you have at your disposal:
- Lead Magnet: These are gated content pieces like ebooks that you exchange for free for your visitor’s information, generally, their name and email address.
- Tripwire: A low-price, low-profit product to entice an impulse buy and increase your customer base.
- Core Offer: Your flagship products you sell at higher premiums.
- Profit Maximizer: These are any upsells, cross-sells, and downfalls you use to maximize the average order value.
The genius behind the customer value optimization process is that it prioritizes your sales process’s back-end, replacing the front-end as the main goal of your marketing efforts. That means you don’t try to sell an expensive product to people who don’t know your brand; instead, the CVO framework focuses on:
- Generating leads with a lead magnet
- Making a cheap sale at the break-even point
- Making a profit with your core offers
- Increasing your profit margins with your profit maximizers
One practical way to find your offers is to take your core offer and reverse engineer the rest. Take your core offer—say, a one-pound protein powder—and think about a simplified version of the product—for example, a 3oz powder package, which would work as a product test.
Repeat the process with the tripwire. Using the previous example, you could offer a free guide to help fitness enthusiasts choose the right protein powder or a free 30-day workout routine. In this guide, you could upsell your tripwire so the lead can continue moving forward in the sales process.
To find your profit maximizers, think about accessory offers around your core offers, which could be high-cost, high-profit offers—i.e., upsells—related, medium-price offers—i.e., cross-sells—or cheaper, but still profitable offers—i.e., downsells. Every offer should connect, so each one becomes a no-brainer for the lead.
For example, DesignCuts, a designer resource hub, offers a bundle with over 20 free resources—that’s their lead magnet.
Then, they offer The Designer’s Timeless Vintage Collection, which includes retro design resources for only $29—that’s their tripwire.
Their core offers are their graphics, templates, fonts, and add-ons, all of which cost between $9 to $69 and more.
Since all of their products are interrelated, we can imagine that most designers buy more than one product, which means that every product leads to more products, thus maximizing their profits. In fact, you can see these related offers below each product.
Step #6: Create a Return Path
So far, we have analyzed an ideal purchase process, where you attract a customer that converts every step along the way. The reality differs from this picture. Your visitor will most likely follow a more chaotic process, where they end up visiting your product page, leave your site, and come back to your homepage a week later to check your company further and make a purchase.
You can’t leave your visitors at destiny’s mercy; you need to create a return path. A return path is a separate marketing strategy where you take your visitors and leads, depending on their stage in the buying customer journey, and bring them back to your site to offer the most relevant offer for them. Some examples of return path tactics include:
- Showing a display ad promoting your lead magnet to a visitor who read an article but didn’t sign up.
- Sending an email promoting your tripwire to your leads.
- Showing a Facebook ads video about your core offer to the customers who purchase the tripwire.
- Introducing a loyalty program to your existing customers.
By following up with your leads as they move through the purchase journey, the return path helps you increase the number of transactions per customer and your profit margins simultaneously.
Implementing the CVO framework to an ecommerce store is a continuous process you need to refine regularly. Changes in your data, products, and customer base will lead to new RFM segments, which will affect every other part of the framework, as explained here.
The CVO framework will push you to think about your ecommerce marketing cvo strategy holistically, not as a set of tactics but as a set of interconnected processes. More importantly, it will change how you make decisions; whereas in the past you focused on clicks and conversions, you will now focus on attracting profitable, loyal customers.
Bio: Ivan Kreimer is a freelance content writer for hire who creates educational content for SaaS businesses like Leadfeeder and Campaign Monitor. In his pastime, he likes to help people become freelance writers. Besides writing for smart people who read sites like OmniConvert, Ivan has also written in sites like Entrepreneur, MarketingProfs, and TheNextWeb.