The eCommerce companies that thrive today are the ones that know that Customer Retention Optimization efforts alone could never sustain a healthy business and that Customer Value Optimization is no longer an option but a necessity.
This guide covers what you need to know about Customer Value Optimization (CVO) and explains the concepts related to CVO, such as customer value, customer lifetime value, historical and predictive CLV, customer retention, customer retention rate, RFM segmentation, RFM groups characteristics.
What is Customer Value Optimization?
Customer Value Optimization is a process that allows you to improve Customer Lifetime Value by analyzing your customer database (first-party data) and by using the generated insights for adjustments in your customer experience, acquisition and retention strategies.
The purpose of the CVO process is to put at your disposal all the information you need to increase the number of repeat and loyal customers, therefore generating growth for your eCommerce business in the long term.
Including CVO in your digital marketing efforts represents a big step ahead for your company. If you aren’t already customer-centric, it will force a change in the company’s mentality. Also, CVO will help you focus on metrics that matter the most for your company, metrics such as Customer Acquisition Cost (CAC), Net Promoter Score (NPS), Customer Lifetime Value (CLV), etc. (we love good use of data, so there’s no surprise we’ve dedicated a full chapter to use cases).
Is Customer Value Optimization vital in eCommerce? Definitely!
We’re happy that you’re reading this guide. It will give you plenty of food for thought.
We believe so much in the power of CVO that we’ve created a dedicated tool for it – REVEAL – which automates first-party data analysis, acting as a Data Specialist that you need so much to thrive in a competitive eCommerce world.
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REVEAL automatically analyzes your first-party data and generates insights that you can use immediately to design better customer experiences.
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Why is CVO important for your business?
Focusing only on Conversion Rate Optimization (CRO) is no longer a sustainable approach. The fact that acquiring new customers typically costs around 6-7 times more than retaining the existing customers should be enough to get you interested in optimizing customer value.
If you’ve just launched your eCommerce store, new customer acquisition is an important part of your marketing plan, so you need efficient lead magnets to convert visitors from all traffic sources. We have 9 actionable lead magnet ideas to gain more customers for your eCommerce Site.
Here are some of the reasons why the Customer Value Optimization system should play an important part in your marketing efforts:
- It gives you clarity and objectivity when you want to make more data-driven decisions;
- It helps you discover the customer segment that is most valuable to your business;
- It helps you prepare an optimized experience for both new and recurring customers, preventing you from losing money;
- It allows you to rethink how you design paid campaigns and invest your ad budget;
- It reveals ways to generate higher rates of response, increased customer loyalty and better customer lifetime value;
- It contributes to shifting towards a customer-centric mindset and to building a stronger strategy to improve Customer Retention Rate;
- It allows you to identify best selling products, optimize inventory and eliminate elements that harm your business.
The beginning is the hardest part to overcome, but we’ve got you covered – from the general concepts to the Customer Value Optimization Methodology we’ve created.
An in-depth understanding of CVO
This guide will help you understand how the Customer Value Optimization process really works.
Although we recommend reading the chapters in order, you might be familiar with some of the concepts and willing to skip some parts. It’s ok, we made sure you can easily jump to the most interesting topic for you.
In the next chapters of this guide, we will cover:
Find what Customer Value is and how Customer Value is calculated.
See the difference between Historical Lifetime Value and Predictive CLV, then find the definition of a Customer Lifetime Value to Customer Acquisition Cost Ratio.
We will dive deeper into what Customer Value Optimization is and present you with every step of the CVO Methodology.
Do you need CVO more than you think you do? Read the use cases: Historical CLV on groups, Predictive CLV, NPS score, NPS score by brand, NPS by Customer Attribute, Chances to Place Next Order, Customer segments.
Learn more about Recency, Frequency and Monetary Value (RFM) segmentation and RFM groups such as Soulmates – the term we use for existing great customers. Discover strategies that help you attract and retain ideal customers.
Ready to read the First Chapter?
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Frequently asked questions about Customer Value Optimization
Customer value represents the revenue that customers bring to a business. Customer value reflects how healthy your eCommerce business is, how profitable and how well-prepared your management is.
Customer Lifetime Value is a method that helps you predict how much profit each of your customers can produce over the course of your relationship with them. It is an important indicator because it can tell you whether you are actually making money from your new and present customers or losing it. Acquiring more customers typically costs around 6-7 times more than retaining the existing ones and the cost of acquisition has increased dramatically over the past years. So CLV can tell you how much a customer is really worth and how much you can invest in acquisition until you drop below break-even.
There are two methods to calculate CLV: historical CLV and predictive CLV.
Historical CLV is calculated as Lifetime Value x Profit Margin.
A detailed predictive CLV could be calculated as CLVs * Monthly retention rate + Monthly discount rate – Monthly retention rate.
The goal of your CVO efforts is to gather all the information you need to increase the number of repeat customers and their loyalty, to increase the frequency with which they buy and to increase the value of their order.. This, coupled with a great customer experience, is what generates eCommerce growth in the long term. It promotes a customer-centric mindset and keeps you focused on metrics that matter the most for your company’s growth.
The RFM model is important for CVO because it helps you understand the customer journey and segment your customers by calculating their score for Recency, Frequency and Monetary value. The RFM distribution model enables you to create better customer experiences that increase loyalty and generate repeat purchases.
Why do I need a CVO tool?
How do you know why people buy from you? Or how often? What are their favorite products? What made them stop buying? How do you identify buying patterns?
Of course, there’s a lot of data generated by an eCommerce business, but how many resources do you really have to dig into this mountain of information and transform it into gold?
To maximize the power of CVO, you need the features of an automated platform because:
- It’s the most efficient alternative for CVO, so you will no longer need to spend time and resources to dig into your own data;
- It acts as a Data Specialist, helping you avoid data analysis paralysis;
- It empowers your teams with unified insights about customer behavior, ideal customer or buyer persona, customer journey;
- It helps you define and gives you a better understanding of your RFM customer segments or CVO funnel;
- It reveals data anomalies and helps you understand which are the most important groups of customers when balancing the customer acquisition cost with the margin they generate;
- It reveals buyers’ behavior over time and the changes that occur by performing cohort analysis;
- If allows you to perform a qualitative research that reveals the most valuable customers, those who are profit maximizers;
- It helps you reiterate successful marketing campaigns that feed the sales funnel and drive profit;
- It allows you to analyze the average transaction value per RFM group but also the transaction value per customer, generating valuable insights for your growth marketers when increasing the average transaction is a struggle for your business.
- It helps you improve customer satisfaction by analyzing Customer Effort Score (CES) and Net Promoter Score (NPS).
- It can be integrated with various major eCommerce platforms.
We’ve created a series of short videos that provide you with deep insights on how to grow your eCommerce store using smart tactics and tools. Subscribe to our YouTube channel to get more eCommerce Growth Tips from Valentin Radu, CEO of Omniconvert.
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