Why Online Merchants Need to Measure Lifetime Value

Apr 30, 2012 6:23 AM  By

The ecommerce world is blistering with metrics such as average order value, conversion rate, customer acquisition growth rate, return on advertising spending, etc. Gathering this data from your analytics packages will quickly make you feel like you’re assembling Frankenstein’s monster.


When I talk with online colleagues, I’m amazed at how much emphasis is placed on deep-diving into these types of metrics. That doesn’t mean they are not important; they are. But what these data points really represent is one thing: buyer behavior.

As dot-com professionals, the question we really need to be asking ourselves is not how we can increase conversion rate or lift AOV; we need to be asking ourselves this question: What is going to move—or shift—web buyer behavior from existing (current) needs to future (new) needs?

Why? Because it’s new customer needs that contribute to lifetime value gains.

Whenever I am evaluating web marketing channels or online programs, I no longer think just in terms of marketing spend or conversion rate or cost per acquisition. I think in the context of what is going to move customer behavior positively to impact profitability. The best metric to measure this is lifetime value.

LTV is all the purchases the online buyer has made during his lifetime plus the purchases he’s likely to make in the future (discounted in today’s dollars.) Since your initial web sales are always greater than the first sale you make to a web buyer, this refocuses your internal discussions from ad-spend management or sales growth to buyer profitability.

First, it tells you how much you can afford to invest today in acquiring a new web customer. Therefore, LTV forces you to change how you look at web acquisition costs and profitability. This is key because you’re using web marketing channels, such as PPC, SEO, affiliate programs, CSEs and e-mail—which all have varying costs and reach—to drive online sales. Wouldn’t you be willing to spend more to get the right customer? That’s why it’s important to know which acquisition method is adding LTV gains.

Next, as I was recently reminded by a marketing colleague, LTV is about buyer behavior, or a buyer’s current needs and future needs. Both influence how buyers transact online today. You’ll want to understand this behavior rather than relying on your own opinions or beliefs.

For example, current needs can be described as short-term focused. They focus on areas such as your product assortment, a customer’s order size, and the buyer’s order frequency. While these may increase top-line sales, they don’t move future value or LTV.

On the other hand, future needs are “new” needs. They are long-term focused, create growth, and drive LTV. Examples might include a new product category, new price points, an underserved market, or product cross-sells.

So the real question we should be asking ourselves as e-commerce marketers is how we influence web buyer behavior in a way that moves LTV, rather than staring at a jumble of data that resemble Frankenstein’s parts. When we do this, it allows us to be more effective with our acquisition strategies; it lets us definitively answer the following questions:

  • Am I spending enough on PPC to acquire as much incremental sales as possible?
  • Is SEO spend creating acquisition of new customers?
  • Can I spend more on e-mail or social media to further engage my best customers?

Daryl Logullo is ecommerce manager for Southern Fulfillment Services.