Not until recently, Customer Lifetime Value (CLV) was maybe that middle child of ecommerce. It was there, it was acknowledged, however it was never the main focus of an ecommerce manager or ecommerce owner.
COVID came, and besides contributing to the digital transformation of the ecommerce industry, it has also contributed to major switches in the buyers’ behavior and the buyers’ psychology.
As soon as the clock strikes midnight on 2021, so did the growth predictions for what the future of ecommerce would look like. From the beginning, acquisitions, to the end, retention and loyalty.
Increased Acquisition Costs
As per the Future of Ecommerce Report by Shopify:
Ad dollars are following the consumer online. Even though overall ad spend is forecast to decline 20% in 2020, digital ad spend is estimated to increase 13%. The pandemic-induced plunge in customer acquisition costs was short-lived. Costs on Facebook have rebounded and are at or near pre-pandemic highs. In late 2020 paid search spiked 17% and paid social advertising increased 24%.
Competition—fueled by the move to ecommerce—is accelerating digital ad growth. Industry data reveals increased spend in paid search, social, and connected LTV.
And let’s look at some data too…
Acquiring customers is more expensive than ever. 2020 has been a wild year for Facebook ads with Covid-19. Since March, Facebook ad CPM in 2020 began to rise with increasing velocity up to the end of the year.
Shopify states: Though reaching new customers is important, the rising competition for online attention has reinforced the value of keeping existing customers. Retention has overtaken acquisition and conversion as a top priority for many businesses.
The never ending increase on CPMs and CPCs plus the issues with data privacy and the extinction of 3rd party data has brought Customer Lifetime Value in the limelight as being the cure for ecommerce growth.
That statement does make sense in the happy scenario that the team that handles your growth understands CLV and its flaws (Yes, CLV is not perfect) and understands how to work with it.
In the wrong hands, CLV can become a quick kick in the ass.
Ecommerce Growth, what does it actually mean?
Valentin Radu said this: A lot of times when people think of the growth formula for ecommerce, they think of this:
For Traffic x conversion rate x average order value to actually equal growth, it is vital to add customer lifetime value & customer acquisition cost.
Yes, traffic and conversion rate are undeniably vital. On the other hand, if you make incredible efforts only towards generating traffic and you generate one million new visitors, but your conversion rate is terrible, that’s nothing but a waste of time and resources.
That’s why conversion rate is crucially important.
However, most eCommerce experts stop here. Because they guide themselves solely on Google Analytics. Which is a fantastic tool to analyze visitor behavior. But to make an eCommerce thrive, you also need to analyze the customer behavior.
So, even though you have great traffic and a great conversion rate, however your margin and the customer lifetime value, which is, in fact, the net profit that your business will get from a customer throughout his entire lifespan — is not justifying the acquisition cost, then your business will most certainly collapse.
Simply because it’s not sustainable for the long term.
From our data in Reveal, the majority of companies end the relationship with a customer right after the customer’s first order. And it looks a lot like this:
Those companies don’t even bother to check their data and see if that customer has bought again. Let aside creating a customer journey, focusing on giving its customers an emotionally rewarding experience that would make that customer loyal…
I know, it sounds strange. This doesn’t even sound like business, does it?
So, the Ecommerce Growth Formula and the mindset should be updated to something like this:
Well, in order to maintain profitability, you must have profitable customers, right?
Orders don’t just appear out of the blue, they are made by human beings, which are not always logical creatures.
Because they are biological – so they govern their decisions on emotions, rather than on reason.
But you, as an eCommerce expert, must appeal to reason.
So, to achieve long-term profitability, you must be as profitable as possible at any transaction.
And here’s the catch: while most of eCommerce entrepreneurs try to be profitable from the first order, they tend to disregard the next orders, to make unnecessary cuts on their marketing budgets, and neglect the long term revenues that come from the same customers, as long as you make them install the good habit of buying from you.
Customer Lifetime Value is not a transactional metric.
As Valentin said above, it’s important to understand that Customer Lifetime Value is not a transactional metric. It does have a transactional and monetary impact but it’s not a transactional metric.
In a Clubhouse conversation I had with Steen Rasmussen, he was spot on saying that the main KPI to watch for CLV is Customer Experience (CX).
This means that regardless of the fact you manage to acquire customers every month, if your post purchase customer experience is bad, and those customers will never order again from you, there is no conversation about customer lifetime value. Because there is none to talk about.
To understand more about what Customer Lifetime Value is, how to measure it correctly check these articles out. We have been talking about it for some time now.
Customer Lifetime Value Applicability in ecommerce growth strategies
Lorenzo Carreri, my partner in this monthly round up, came up with a genius idea for this month’s topic, and it goes like this:
And the responses I got for you this month are very interesting.
Let’s start with Lorenzo.
CRO and Growth Consultant
I am a CRO and Growth consultant with 11+ years experience in digital and tech. Helping eCommerce and SaaS grow profitably is what gets me excited every day.
First I’d make sure the data infrastructure is present and reliable. You can’t improve things if you don’t measure them correctly.
This means bringing all data (analytics, CRM, customer support, email marketing, ads, logistics, etc) in one unified database, so I can query it and pull all the reports I am interested in.
Secondly, I’d get into deep research mode, both quantitatively and qualitatively.
I’d start by segmenting customers by different variables such as channels and ads they came from, products they bought first, AOV, repurchase rate after X, Y and Z days, LTV, products bought, etc.
This already gives me tons of insights into people’s behaviour along their lifecycle.
I’d then proceed with gathering qualitative data, mainly surveys, customer interviews and customer support tickets. You can add others if needed.
The questions I am trying to answer are:
Who are my best customers? How are they different from other people? How can I acquire more of these? Why are they considered best customers? Why do they buy from me? What are the patterns (if any) that all best customers have? What new products can I develop to make them happy?
And try to figure out the same for my worst customers.
So now I have a bunch of insights which will feed my hypothesis on improving LTV.
And then I’d prioritise executing experiments in the whole business cycle, by forecasting the cost and the potential long term impact. You can run scenario analysis based on your current data.
For example prioritising making iterative product improvements based on customers’ feedback might have a big impact on retention, but it’s also more time consuming and expensive compared to improving the customer onboarding process.
Then finally I’d analyse the results of the experiments based on short and long term KPIs and start the whole process all over again.
Shiva Manjunath
CRO Marketing Manager at Gartner
An experimentation wizard who is obsessed with data. I’m passionate about testing to learn, driving revenue, and creating high-value user experiences.
Hard hitting question. I feel like you can write books about this and still not encompass what you want to get out of it!
First, you want to establish a baseline of behavior. That’s what I always have done when I’ve started a new CRO position. You need to actually understand your customer before you start devising a strategy to tackle CLV. As you start running, and iterating on, experiments to better understand behavior, you start understanding what the customer is looking for. This should be done in parallel with UX research/surveys. There’s no point in even considering the lifetime value of a customer if you don’t even understand your customer.
Once you have solid research on the user to know what they are (and aren’t) looking for, you can start defining a strategy to improve on the customer lifetime value. The true answer for me on how to actually improve this strategy is dependent on a number of things, including the business model, the product, the actual customers, among other things. But generally speaking, the things I’d generally gravitate towards building lifetime value are:
* Segmentation: Stop trying to force all your customers down the same path for lifetime value
* Experimentation: Continue to optimize the user experience, but always keep an eye on longer-term metrics/experiences rather than shorter term wins
* UX: Actually ask your customers what they want, and stop assuming you know better than them
* Value: Do your best to be top of mind and provide them actual value (based on what they say they want from user research). Bonus: actually reward your loyal users with things that THEY find valuable
Director of Marketing Client Services at Happy Cog
Elise oversees NYC-based Happy Cog’s SEO, Paid Media, and Analytics teams as the agency’s Director of Marketing Client Services. She has over 13 years of digital marketing experience and is a student of consumer behavior and user experience.
I could answer this question a million ways.
First, I’d want to make sure we have solid measurement in place. Most analytics is crap, so I’d want to be sure that the data I’m collecting is sound enough to drive decision making. If I cannot get full insight into how the current site is performing, I will have no way to understand what needs to be improved.
After that, I’d move to execute a robust conversion optimization program. With that, I will not only be looking at increasing the number of customers that purchase, but I’d also work on enhancing the post-purchase flow. So many brands neglect the critical work of building community with their customers after the sale.
To be clear, building a community is not the result of the basic communications that are deployed to your customer base when an order is placed (order confirmations, shipment notices, etc.). Building community is all about smartly using your data to deepen your relationship with your customer. Because most companies suck at this, it would be simple to stand out from the crowd here.
Providing your customer with tips and tricks for their purchase is a great start. Taking it to the next level would be providing information that your customer needs but doesn’t relate to anything they can purchase with you. The connection stands to be even stronger if you leverage what you already know about the customer to personalize your communications.
Jonathan Ivanco
Customer Experience Data Evangelist
Jon Ivanco is a Customer Experience Consultant with a focus on data for eCommerce companies.
Step 1: Grab a list of all the people that have purchased multiple times at the total amount that is deemed to be 4-5x the standard Average Order Value
Step 2: Setup calls with as many of them as possible
Step 3: Ask them how they heard about us, what gave them the confidence to trust us as a brand, and what was the main reason they kept coming back to purchase from us
Step 4: Take all the data collected and make sure that all the common messages exist on the website, on the product pages, in the email correspondence, and every touch point a customer might have with us
Step 5: Take stock of the frequency we reach out to people, the content we’ve been using to reach out to them, and how we are currently using segmentation
Step 6: Strategize a plan to alter the narrative to better cater to the existing most successful narratives as provided by our best customers
Step 7: Do a cost analysis on the effectiveness of sales, email campaigns, and look for opportunities around telling a bigger story for the industry
Step 8: Position ourselves to unlock partnerships with other like brands to sell beyond our store and provide value beyond our products
Step 9: Repeat this process every 6 months
Step 10: Use data and feedback from partner offers to unlock new business opportunities
Chase Dimond
Top Ecommerce Email Marketer | Sent over 1 billion emails resulting in $50+ million in email attributable revenue.
7,628 Brand Owners & Ecommerce Marketers benefit from my weekly email marketing newsletter.
Whenever I first look at a client or prospects email account, there are few places I immediately turn.
Those places are: Flows (aka email automation), Campaigns, and Segmentation.
After working with and reviewing hundreds of email accounts, the biggest mistakes I see are:
Brands don’t send enough campaigns, brands don’t have enough flow setup, and brands are just batching and blasting (no segmentation).
In my opinion, there’s no silver bullet in email marketing. You have to do a number of things really well.
It’s a matter of maximizing revenue and minimizing churn on the campaign side.
It’s understanding which segments you should be hitting and when.
It’s having flows setup at each point in the customer journey.
However, if I were to focus on one thing to increase the brand’s CLV, it would be focusing on proper segmentation.
The holy grail of marketing is sending each individual subscriber the right message at the right time.
And the best (and really only way) to accomplish this is through segmentation.
This interview I did with Juliana will be the perfect training for you to understand how to use Transactional Behavior Segmentation to grow your CLV.
Top 100 Marketing Technologist, Author & Narrative Builder
Yaag is among the top 100 global martech influencers, a TEDx speaker, and a category creator. He helps early stage martech startups in building their narrative and category. He conducts marketing workshops and speaks at major global forums, conferences, and academic institutions.
My process would be pretty simple:
1) Segment my existing customers based on recency, frequency and monetary value (RFM)
2) Identify the commonalities between my most valuable customers and make it my ICP
3) Develop a highly focused onboarding process for that ICP
4) Engage with content specific to their use case and pain points (not spam them)
5) Upsell only when it makes sense (the idea is become their partner and live up to the trust)
6) Finally, pick up the phone and talk to them at least once a month.
Customer Experience Consultant
Will Laurenson is a customer conversion expert, with 9 years experience optimizing customer journeys to convert more traffic into customers, and retain those customers for longer helping companies achieve more profitable growth. He is also the host of the Customers Who Click podcast, interviewing guests from across the marketing spectrum to give actionable insights into growth.
Apart from making sure the basic marketing automations are set up (abandoned basket, upsell, repeat purchase, feedback & review etc), the first thing I’d really want to do is create a bunch of segments for the database.
Keeping it simple is fine, you could look at maybe 3 different value segments; high, medium, low, and split into any distinguishable verticals, for example you might have customers who subscribe, and those who just buy as and when they need. You’ll still have 3 value segments in both groups, but their behaviour will look different.
I’d then want to analyse what the difference is.
What makes some people subscribe month after month, or what makes others come back again and again to purchase.
What are the key attributes for these audiences that are missing from the others, and how can you encourage those behaviours in the lower value audiences.
This requires both quantitative and qualitative feedback of course.
Quantitative data will tell you what the differences are in terms of how much they spend, how frequently they spend, and which products they spend on.
Qualitative data will tell you why. Why do some subscribe and others dont? Why have some chosen to cancel while others are happy to pay for years on end? And why some purchased once and never came back.
This is the gold.
This is the information that will let you craft your messaging, optimise your website and marketing communications to help you bump as many people as possible into those higher value segments.
Abby Wilson
Web Developer and Copywriter
I’m the founder of Tailor Framed, a Web Development company that relies on user research to make informed web design and copywriting decisions. My goal with every project is to make the most of the traffic you already have and make a great first impression on every visitor.
Broaden your focus from grabbing attention to holding attention.
When you grab people’s attention, you increase traffic. But unless you can hold that attention, people bounce. Ideally, you want to turn traffic, into an audience, into a community. Brands should make people feel like they have a relationship with them. Shift your key metrics to subscribers and time spent, instead of clicks and views.
By holding people’s attention, they spend more time with you, and they spend more money (i.e. CLV increases). So holding attention has to be the overarching goal. How do you do that?
Instead of having individual pieces of content, create a series. It could be blog posts but having a podcast series would be even better. Something that would keep people coming to your brand. Something that invites them to be a part of your story. A series that turns casual visitors into loyal customers.
Commodity content won’t work here. The goal has to be a series that aligns with your core brand message.
Founder of Spark Retention
Alex is a marketer, retention and loyalty enthusiast, and Disney nerd. He is the Founder of Spark Retention, retention consulting for DTC brands. Alex is also Co-Host of The Exchange, a podcast dedicated to the post-purchase experience in ecommerce.
Improving CLV is not easy nor quick. Too many brands get started without a strategy in place. Unfortunately there is not nearly as much published content on retention and CLV as there is on acquisition and CAC.
With any brand I would start by first using The Retention Marketing Matrix to determine what type of retention tactics will work best for that brand. It’s a simple exercise that allows you to discover what retention tactics will work best. Because contrary to popular opinion… a points based customer loyalty program is not the best retention tactic for every brand.
Using AOV and Purchase Frequency to place what the brand sells on the matrix I would then choose tactics. The right side of the matrix lends itself better to your standard tactics like loyalty programs and your basic post-purchase flows. The left side is more about how you structure products and experiences around your core offering.
TL;DR – Before you start, use the retention marketing matrix to choose your tactics. Retention is not one size fits all :)
CMO of Crossrope
Serge is the CMO @ Crossrope, a fast-growing fitness brand on a mission to inspire millions of people to get fit in a fun, different and affordable way. He also loves being a dad and helping highly ambitious marketers become world-class marketers. Find him on LinkedIn.
Improving a brand’s customer lifetime value is a fun and multi-faceted process that has to begin with understanding as much about the brand as possible. It’s a process of discovery.
I would start by looking at the fundamental unit economics – AOV, CAC, CLV, etc. It’s important to get a high level view of the marketing engine that drives the business.
Next, I would look at the company’s NPS score (if they have one) and see how the brand is talked about by its customers. It’s very difficult to improve lifetime value if the customer experience is broken.
I’d also want to speak with a few different customer segments to get into the mind of the brand’s customer. Two of my favorite segments are 1) repeat customers and 2) NPS passives. For the former, I want to know what drove these customers to come back and make another purchase. For the latter, I want to know what the missing ingredients are that would make the product/experience go from ‘just OK’ to worth talking about.
From there, I’d learn more about the product – why do people buy it, what problem does it solve, etc. Is it something customers buy once, seasonally, frequently? What’s the repeat purchase rate? I want to know if there are opportunities for a subscription play.
All this information gathering will give guidance on the higher level CLV strategy and the opportunities that exist for the brand.
If the customer experience is broken, we’ll start by analyzing and improving the experience. If the product is a one-time purchase, we’ll brainstorm how we can extend the product line (with accessories, limited edition releases, etc.) so we can offer more value to existing customers. And on we go.
Tactically, I also like to look at what the brand already has in play to drive revenue from existing customers.
For eCommerce brands, email is still king so I would start there. I would analyze the brand’s customer segmentation, their post purchase flow performance & messaging, and identify where there are low hanging opportunities to give more value to existing customers. There are always low hanging opportunities.
There’s no perfect science to improving customer lifetime value, but through the process of discovery you can help any brand uncover opportunities and generate new ideas for moving CLV in the right direction.
Professional Marketing, Analytics and CX Freelancer at Team Advertico
I am a marketer, developer and data nerd. Every day I combine digital marketing, technology, and data to create ideal solutions for customers. To keep it short and simple: Customer centricity!
For me, data is a resource for aligning a company to the needs of the customer, as well as to those of the employees to generate the most positive results for all parties involved.
Before coming up with any strategy or tactic – it’s back to basics. Understanding the customers and their problems. Why do they buy from us, what do we offer that the competition doesn’t?
As I’m a tech, marketing and data guy at heart i’d start with our first party data, our crm, our buying behavior – create data informed customer profile.
And then comes the strategy! It’s again built around understanding when are those “mysterious” single moments of truth where we as a brand can shine and help our customer to get his job done. Identifying how we add value to her or his life and building upon this.
And honestly that’s it – every tactic, every action is derived from that “basic” analysis. Cause creating your brand CLV whales, creating customers who root for you – it’s the magic of understanding when and how you help them become better.
Founder at Day By Day
With over a decade of experience behind her, Irit has a special knack for translating the 328 tasks on your plate into concrete, step-by-step processes that propel your business forward. When you waste 0.0 minutes on inefficiency, you can get more done in far less time.
I am a big believer in personalized content marketing.
Telling a story behind the company and their products.
Leading the customers on a journey to believe that by using/purchasing our products, they will feel X. Where X is in line with the brand’s and the customer’s values.
Making customers feel like we are sending them a unique email each time that is tailored to their needs and desires.
These are not sales emails. These are emails helping live out their dreams.
Initially, there would be content posted on social media. Collecting data as we go about our customers and how they engage with us. The content would show the customer’s experience and feelings when using/purchasing our products. As customers start to purchase, we would need to learn more about their habits, their wants, their lifestyle. Then we could target them with specific emails with stories about others who have purchased similar products and what impact it made on their lives.
This can be done using intense segmentation and conditionalized content in email marketing tools.
The stories create brand loyalty and a desire to be a part of this community.
In the end, Customer Lifetime Value really matters.
In my opinion, the trap many ecommerce marketers fall into is when they are investing a lot of effort to do a snapshot of their reality at that current moment, but it then requires a ton of effort to recalculate everything from the beginning next week or next month.
Ecommerce is dynamic, and you have to capture that dynamic and the factors that affect the growth of CLV. Like the fire, you have to analyze the transitions from moment to moment to have the whole picture.
One particular example I want to leave you with is Netflix’s.
After you have determined customer lifetime value, you will need to know what to do with that information, especially since you know how much you should be spending to acquire a new customer, from overhead to marketing.
In Netflix’s example, let’s imagine a person stays subscribed on Netflix for an average of 25 months and has a lifetime value of approximately $300.
If you’d subscribe to Netflix right now, you would pay $7.99 per month for the cheapest price plan, which means $97.88 per year.
If you were Netflix, would you spend $150 to acquire a customer? It’s counterintuitive to pay more to acquire a customer and still be profitable. You can see now why determining your customer lifetime value is so crucial.
Yes, Netflix would lose probably $42.36 in the first year (the pricing is still changing for Netflix subscriptions). But, as I mentioned earlier, a person can be, on average, a Netflix customer for 25 months. Even if the company doesn’t make an immediate profit, that doesn’t make it unprofitable by any means.
You shouldn’t be afraid to lose money in the short run if that will boost your revenue later on. Customer lifetime value will show you the amount of money you can afford to lose in order to secure a profitable future. Without this number, it’s impossible to optimize your revenue.
Maximizing the customer lifetime value
Keep in mind that your customers are not a herd of sheep. Each customer has particular needs, likes, and dislikes. Therefore each is unique.
Some people won’t or can’t pay for Netflix, not even for a month. Some might remain customers for several years, while others might not even cancel their subscription, ever.
Netflix offers three different price plans. A premium user, who remains a customer for three years, is more valuable to them than a customer who buys the cheapest price plan for four years.
By tracking each customer individually, Netflix can optimize their lifetime value. For example, if you stop watching movies, they will know you might cancel your subscription. So they try to persuade you to remain a customer, right before you think of canceling your subscription.
Tracking stats and behavior of users helps Netflix to reduce its churn rate.
So, to maximize your revenue per customer, you have to track each individual.
By monitoring your customers’ specific actions on your website, you can determine the steps or develop different features meant to influence customers to remain engaged or even engage more.
These are the happy customers, so they will stay with your company longer.
Maximizing customer acquisition
Netflix knows their customer lifetime value and has fine-tuned their product to reduce churn. This way, they can afford to spend more on marketing. For example, their affiliates are paid $16 for every customer they bring in.
Mind you, the first month is free on Netflix. Even though $16 is not much, many users don’t become paying customers after the free trial. The affiliates get that $16 per customer, regardless of whether those users become profitable or not.
However, a percentage of those users actually do turn into paying customers. Otherwise, Netflix wouldn’t be able to keep paying affiliates $16 or spend $2 for every click from their Google AdWords campaign.
Are you an ecommerce marketer or ecommerce owner and you want to learn more about how to optimize Customer Lifetime Value?
There are plenty of online courses that teach you how to spend marketing budgets on customer acquisition, but no one tells you how to better serve current customers and improve acquisition through them.
This course does.
✔️ 10 international eCommerce experts
✔️ Over 15 chapters & 80 lessons
✔️ More than 12 tools & resources
Improved skills after this course?
❤️ Customer Loyalty and Retention
? Email Marketing
? Customer Segmentation
⚖️ Customer Lifetime Value Optimization
?️ Qualitative and Quantitative Research
⚙️ Jobs To Be Done Methodology
??? Net Promoter Score
? Cohort analysis
? Customer Onboarding & Support
? Acquisition tactics and Attribution
Sign up for the Super Early Bird here.
Feel like you learned from this article?
Want to suggest a new topic for the next round up or, simply say hi to us?
Send us your thoughts, suggestions or questions at juliana(dot)jackson(at)omniconvert(dot)com or to carrerilorenzo(at)gmail(dot)com.
This article looks so pretty on our blog thanks to the help of my amazing colleague Andrada Vonhaz.
