When an ecommerce business is brand new, the pace can be frenetic. Sales success and fast company growth can put some entrepreneurs in over their heads, and they need to dig themselves out, fast. They might implement cost-cutting measures, often slicing marketing budget, as a quick fix measure to survive.
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Often, their advertising campaigns are based simply on measuring the dollars spent and the dollars received back in sales at the time.
But companies that take this approach are making a pivotal mistake: They’re not contemplating the true value of a customer, and they don’t realize all things direct depend on customer lifetime value (LTV). They often fail to recognize revenue optimization as a means to increase customer lifetime value and boost profit.
Learning to identify, measure, and monitor the value of each and every customer, over months and years, is what truly drives the fortunes of an online merchant. Customer lifetime value is a powerful tool, which, when paired with analytics, can drive triple-digit growth. It can determine invaluable marketing metrics, including the amount you should spend to acquire a customer, the amount you should spend to retain a customer, which customer segments are worth targeting, and the ROI of a marketing campaign.
Here’s how crosschannel merchants put LTV to work.
Increase customers’ value
There are many ways to increase the lifetime value of a customer. For instance, you can get customers to buy more, pay more for what they buy by raising prices and simply the old fashioned way of loving them to death during and in-between purchases so they come back. In general, it’s more than just suggestive selling—the old, “Would you like to supersize that meal?” Rather, it’s how you coddle and service your customers when they order and buy, or when they call to end the courtship.
Garbage in, bankruptcy out
If you can’t accurately discern LTV, failure is the only possible end result. Without an information system and people who can monitor and track LTV accurately, you’re destined to be left guessing. How much can you afford to spend to acquire a customer? That depends on an accurate calculation of LTV. What channels can you afford to invest in? Again, LTV will show you the way.
To truly put LTV into action and maximize its value, you must incorporate analytics. The companies that have mastered the ability to take LTV to the next level, using analytics, are the ones that are generating organic growth. Analytics can be combined with media cost data to tell you acquisitions costs across your channels, giving you insight into which channels bring in the most valuable customers.
Furthermore, you must determine what your lifetime value contribution margin (LTV CM) number is on a channel by channel basis. This metric tells you what’s truly left to pay for overhead when you subtract out all variable costs (e.g. product cost, fulfillment, advertising, etc).
Optimize cost per acquisition
When you know a customer’s LTV CM, you gain insight needed to determine how much you should invest to acquire that customer—the cost per acquisition, or CPA. This is turn lets you make more informed decisions about where to spend your ad dollars, and what you stand to profit from your marketing strategies.
From here, you can adjust your CPA investment to dial into maximum ROI. Your CPA can’t be too low and it can’t be too high. Miscalculate on the low side, and you rob yourself of the confidence you need to go all in and invest aggressively in advertising and marketing. Guess too low and you risk never seeing a return for that upfront investment in the channel.
The truth lies somewhere in the middle, and can only realized through the accuracies and diligence used to track and monitor LTV.
Understanding the importance of LTV is the first step in the process. Once it’s calculated, the optimization process begins, requiring careful modeling, strong analytics, and the ability to track each dollar spent by channel.
Dan Roitman is founder and CEO of Stroll.