> Chapter 1
What is Customer Value?
What is customer value and how do you calculate it in relation to the customer value optimization process? This is the first step of the CVO process.
Table of Contents
eCommerce has one main challenge: the customer. This guide will reveal what customer value actually means, how it is calculated, what the methodology of achieving the maximum customer value is and different use cases and case studies to help you discover how Customer Value Optimization applies in real eCommerce store situations.
What is Customer Value?
Let’s start with an interesting evaluation:
Oberlo presents some very recent statistics about the top eCommerce companies in the world. The top three feature Amazon, Alibaba and Walmart. What do these three giants have in common? We think it’s safe to say that it must have been one thing only: customer-centricity. Rather than striving to achieve short-term profits, they chose to focus on the one thing that promises long-term company growth, i.e. the customer, and built their strategies accordingly.
This is how Customer Value was used as a concept. It was actually first mentioned in 1954 by Peter Drucker, a renowned and influential thinker on management, in his theory that traditional management is incomplete if the gathered data does not imply external factors as well. Customer value was the missing piece: it refers to the revenue that customers bring to a business in their lifespan.
In other words, customer value reflects how healthy a business is, how profitable and how well-prepared the management is.
There is a common eCommerce Growth formula that most of the stores are guiding by, which is displayed as such:
T x CR x AOV = G
- T = Traffic
- CR = Conversion Rate
- AOV = Average Order Value
- G = Growth
However, if you use this formula (or a similar one), you associate too much traffic acquisition and conversion rate with growth, while this does not necessarily mean higher profits and lasting customer relationships.
Also, a high Average Order Value could mean that yes, you convinced people to buy higher value products, but are they coming back to your store?
The latest events (the Covid pandemic of 2020) proved to us that we need to shift the business focus from wasting budgets on traffic acquisition to retaining customers. Meaning that, during a crisis, you can not rely only on acquisition, but on your relationship with your customers, as well. The eCommerce market will soon become oversaturated, the acquisition will rise again and again and again as a consequence, so the only differentiator will be the approach on customers.
On top of that, studies confirm that an increase of 5% in customer loyalty can increase profits by anywhere from 25% to 95%, Moreover, customers who had a better experience with a brand are prone to repurchase and recommend the brand to others. Pretty accurate, right?
How is Customer Value calculated?
This topic naturally flows towards the question: what is the correct formula for business growth?
Jay Abraham resumed it in 3 main key pillars:
- Increase the number of customers
- Increase the average transaction value per customer
- Increase the number of transactions per customer
Putting this in an actual formula, that would be:
C x CLV/CAC = G
- C = Customers (Traffic x Conversion Rate)
- CLV = Lifetime Value x Profit Margin
- CAC = Customer Acquisition Cost
- G = Growth
So besides customers, Customer Acquisition Cost and the cost of serving customers, the new formula also includes the Customer Lifetime Value metric. We suppose everybody knows how to calculate the number of customers, CAC and the cost of serving customers, so let’s break down Customer Lifetime Value a bit.
Stay tuned for our next chapter with a crucial element in the evolution of an eCommerce business: Customer Lifetime Value!
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