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For newly established ecommerce companies, earning that first dollar is a huge milestone. Next, it’s reaching a certain amount of orders. But without acquiring loyal customers, your business may never truly get off the ground.
That’s because acquiring customers is the first step to building a sustainable business. At that point, the hard work is just beginning. To scale your ecommerce store, you must continue to acquire new customers, but you should also allocate resources to manage customer loyalty and retention.
Customer Lifetime Value—or LTV—is an important part of developing your business, because you want people coming back. These are the people who will continue to invest in your company and be ambassadors for your brand.
By shifting some of your focus away from acquiring new customers and allocating those energies towards engaging and retaining existing ones, fledgling ecommerce brands begin to afford themselves the luxury of thinking longterm.
In fact, a resource by Stitch, Inc. states: LTV helps you make important business decisions about sales, marketing, product development, and customer support. For example:
Many store owners already know how important improving LTV is. However, a majority still are unable to accurately track it for their own business. One survey found 58% of businesses were unable to measure customer lifetime value.
Read on to discover how to:
A simple equation for calculating LTV is:
(Average value of a sale) X (number of repeat transactions) X (average retention time in months or years for a typical customer)
However, the formula doesn’t account for the costs of acquiring a customer. Consider, too:
For early-stage businesses, it’s important to consider customer lifetime value in the context of their “allowable acquisition cost.”
This is typically the best approach when resources are limited. However, as your customer base grows and revenues become more predictable, ecommerce entrepreneurs should adopt the second strategy.
When bigger brands are ready to scale, they should determine their investment acquisition cost and use that to inform future business decisions.
One way to determine your investment acquisition cost is to calculate LTV, factoring in average gross margin across your products. Here’s a thorough way stores can accurately assess LTV:
LTV = ((T x AOV) x AGM) x ALT
In this equation, the values are:
A change in any one of the variables above will have a huge impact on LTV. Because of this, ecommerce marketers should aim to either increase their average product’s gross margin or their average customer’s purchasing frequency, order value, or lifespan.
Using the formula above, store owners can better estimate the value their customers bring to their business.
Regardless of whether or not your store outperforms the competition, ecommerce managers should consistently strive to expand their relationship with their customers and increase LTV.
So, again, the four main variables for LTV are average order value (AOV), average monthly transactions (T), average customer lifespan (ALT), and average gross margin (AGM). By employing and optimizing a variety of integrated marketing strategies, ecommerce stores can improve their AOV, T, and ALT. But to improve AGM, store owners will have to negotiate better rates with their suppliers and reevaluate their pricing strategy.
Before your customers check out and complete their purchase, there are a number of ways to encourage them to add more items to their cart, buy in bulk, and purchase premium-priced items to increase their shopping cart totals.
Below are nine strategies you can use to multiply your average order value:
For shoppers, a well-crafted deal can feel irresistible, causing them to consume more than they originally anticipated. An even better promotion also leaves them feeling happier with their purchase (rather than feeling buyers’ remorse).
In a blog post for Kissmetrics, conversion rate optimization expert Fabian Alvares suggests that cash-back techniques can help increase AOV. Alvares elaborates,
Cash-back in the form of gift cards or vouchers such as “Free $10 voucher on your next purchase when you spend $40” can really boost AOV and repeat purchases. You can also build partnerships with other companies which allow gift cards or vouchers to be redeemed at several companies such as “$50 off at CrazyEgg & KISSinsights.
Not only does this encourage repeat purchases, but it also makes it a no-brainer for customers to buy a bit more to reach the minimum spend threshold so they can earn their cash-back rewards.
Unfortunately, shoppers won’t spend more if you’re just asking. You have to offer them something that will make them abandon their earlier shopping budget.
The irony is: Customers are willing to spend more to save an extra dollar. One simple way to encourage higher average order totals is to offer a discount when customers add enough items to their cart to hit a specific spending threshold.
Using tiered minimum order discounts, you’ll see many customers checking out with high enough totals to create a slight discount.
Some bargain hunters who already wanted to buy several of your products may actively try to spend just enough to unlock your next best discount.
Your most loyal customers and the most aggressive coupon clippers will aim to add the right number of items to their cart to trigger your biggest discount (spending $300 or more with the above promotional structure).
Two tips to remember when using this strategy are:
Another strategy for facilitating higher order totals is offering customers a free gift when they spend more than a predetermined minimum amount. Free gifts customers may enjoy include:
Ecommerce marketers, alternatively, can also pair certain SKUs together and offer more targeted freebies with specific purchases.
For example, rather than offering customers a free mug when they spend $50 or more at your online coffee shop, you can throw in the mug if they simply add one of your larger coffee bags (40 ounces or higher) to their cart, regardless of their order total.
A free shipping incentive helps drive better sales in two ways. First, many customers are more than willing to spend a bit more to avoid shipping fees. Second, free shipping minimizes shopping cart abandonment.
According to a study by Deloitte, which was featured in VWO’s blog, “40% of customers are willing to buy more items if they qualify for free shipping.”
Amazon drives more than one-third of its revenue from personalized cross-selling, powered by email, product-page and checkout product recommendations. Other ecommerce brands capture more revenue through strategic upsells too, based on the items a customer already has in her cart.
For consumers and store owners, carefully produced cross-sells and upsells are a win-win. And, for ecommerce brands to effectively trigger additional spending, they must factor in up to eight powerful psychological principles:
Some of your products are better when they’re bundled in a kit or package. This allows customers to use the items together and enhance the value they receive from each of the goods.
Sometimes individual products alone may not seem worth it to customers, but when you specially curate a package with coordinated items, your shoppers can feel confident purchasing the bundle, simply due to its value.
This inventory management tactic also helps stores increase their average SKU prices, which makes it easier for customers to exceed current average order values when multi-product bundles are added as a single item to a customer’s shopping cart.
Ecommerce marketers can safely assume customers only add items of value to their carts (even if they don’t complete the checkout process).
So, increase AOV and incentivize your shopper to spend more: Introduce bulk discounts on purchases of two or more of the same product.
VWO’s Mohita Nagpal shares an illustrative example,
Paperstone, an office supplies company, used Visual Website Optimizer to launch a bulk discount deal on its website. It ran an A/B test and found the bulk discount deal increased its average order value by 18.94% and revenue by 16.85%.
Knowing they can save more now, consumers may be inclined to stock up on items they love.
Companies with high-priced products commonly encounter hesitant shoppers who are reluctant to spend hundreds of dollars (or more) on a single purchase.
In fact, for some shoppers, saving up that much money to use all at once may not be easy. So, to enable your customers to acquire the products they want, ecommerce stores can offer order financing.
Financing options remove a lot of the friction that comes with purchasing high-ticket items. They even open doors for customers who couldn’t otherwise afford an item up front (a $3,295 watch, for instance).
A few tools for customer financing are:
Most customers are concerned about the items they purchase: Can they return them if it’s not a good fit?
So, to increase the chances of a higher AOV, stores should offer and highlight an easy, painless return policy that should encourage shoppers to try more of your products risk-free.
Three things to remember:
After you’ve passed the first hurdle of acquiring a customer, the next challenge is getting them to return and place repeat orders. And it’s clear why.
Research shows that repeat customers, on average, have a 27% higher average order value when compared to first-time shoppers. What’s more, loyal customers have a lifetime value that’s 253% higher than your average first-time buyer.
After a shopper completes a purchase, ecommerce brands can employ different email marketing tactics to re-engage their acquired customers.
In your post-purchase correspondence (whether it be a customer’s receipt, a follow-up email or a win-back campaign), think about ways to strategically prompt repeat purchases.
And don’t forget to make that receipt or transactional email valuable. Here are some ideas:
There’s a ton of anticipation and buildup leading to the unboxing experience. Some have spent days, even weeks, contemplating their purchasing decision, only to wait a little while longer for their order to be packaged, shipped, and delivered.
When it arrives at the customer’s door, there’s always a sense of excitement, and that’s something store owners should capitalize on.
To capitalize on your customers’ excitement, include unexpected extras in your products’ packaging, such as:
Within your product packaging consider asking for (and maybe even incentivizing) customer feedback. Here are three reasons why a prompt for customer reviews is important:
Five major types of drip email campaigns are:
1. The welcome series—This effectively introduces new customers to your brand and can include up to four emails delivered over four weeks.
2. The post-purchase series—This engages customers shortly after their most recent purchase to gather feedback and encourage repeat orders.
3. Win-back campaigns—For idle or inactive customers who have stopped engaging, this is a three-part drip campaign that takes a ‘last ditch’ approach to reconnecting with former customers over two weeks.
4. Abandoned cart follow-ups—Your customers may not always be ready to commit to their purchase when they’ve added items to their shopping cart. To recover more of your abandoned carts, use this three-email series over three days to bring those shoppers back to complete the checkout process.
5. Anniversary emails—Once a year, you get to celebrate a special occasion with customer by offering them a fun reward for their loyalty.
Your business can only thrive if you’re able to recapture the attention of existing customers over and over again.
To keep your brand top of mind while customers browse, use retargeting and other advertising strategies to complement your email marketing initiatives. Here are several paid marketing campaigns you can pursue:
Your goal shouldn’t be to only convert first-time buyers into repeat shoppers. You should aim to get all of your customers to complete new purchases more frequently.
According to Harvard Business Review editor Amy Gallo, “acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one.”
Knowing that, store owners should allocate a large portion of their marketing dollars towards retention marketing to minimize customer churn.
When business owners begin to solve the issues that cause customer churn, they see a huge positive impact to their bottom line. Research from consultancy Bain & Company claims, “increasing customer retention rates by 5% increases profits by 25% to 95%.”
To build lasting relationships with customers, companies need to employ a multi-channel and integrated ecommerce marketing strategy.
A word of advice: Every organization has a finite amount of marketing resources. Avoid spreading your marketing budget and staff hours too thin by trying to be good at everything.
Instead, invest in the one to three major channels that attract your ideal customer.
Another major way of encouraging customers to remain loyal to your brand is by helping them extract the most value from their purchase. To do this, you need to offer thorough customer education materials and responsive customer support.
Additionally, shoppers become fiercely loyal to businesses that regularly interact with them and act on user feedback.
Most ecommerce managers are inclined to offer their customers their lowest prices possible, forcing themselves to operate on razor-thin margins. While it’s noble to want to give your shoppers a good deal, lower prices may be a hindrance to long-term growth.
One way to increase your LTV is to raise your average gross margin. To accomplish that, do one of two things:
Though the idea raising your prices may feel uneasy, you must realize that you’re actually doing yourself a disservice by maintaining your current prices.
In fact, customers can accept price increases from stores they frequent, and most customers are actually accustomed to regular price fluctuations. If you’re like most ecommerce stores, though, you probably haven’t adjusted your prices recently. But luckily, there are simple steps you can take.
For stores that want to offer free shipping and full refunds on all customer orders too, you can use strategic increases in price to offset the cost of shipping product and the inevitable cost of returned goods.
To improve your margins, businesses may also work out better rates with all of the vendors up and down their supply chain. You may be surprised by how much leverage you actually have when you arrive at the negotiating table with your manufacturing partners and shipping providers.
A few tactics you can use to get more favorable rates are:
Provide cash up front. If you’re in a cash flush position yet want to curb your costs, offer your vendors agreeable payment terms with more cash up front in exchange for a discount on services.
To further fuel business growth, ecommerce entrepreneurs need to do four things:
When you audit your customer base, store owners instantly see a huge spread between their least active and most active shoppers.
At that point, identifying your biggest spenders and most profitable customers is easy. Common behaviors they’ll exhibit include:
This helps keep margins healthy and customer service headaches to a minimum.
Once you’ve developed a buyer persona for your most valuable customers, the next hurdle is discovering where they came from and how you can acquire more of them for your business.
After you have identified your most valuable customers, you can work backwards to see how you’ve acquired them in the past. How did they learn about your company? What have their pain points been? What has excited them?
That way, you can identify the marketing channels where more high-value customers may live. For instance, if you notice most of these customers came from a particular audience segment on Facebook, you will want to double down on campaigns targeting that segment.
Alternatively, you can see if there are any common threads in their purchasing behaviors. For example, an electronics store may realize their most profitable customers are those who have purchased at least one laptop from them in the past.
That’s because those same customers will then return to the store and purchase anywhere between three and 15 tech accessories. Compare that to the average shopper who typically buys a handful of cheap smartphone accessories and has a LTV that is one-tenth the value of the store’s laptop buyers. In this instance, managers of the electronics store should try and push more customers to purchase a laptop.
Bottom line: finding your most valuable customers may be easier than you think. Ecommerce marketers can pinpoint ways to make existing customer relationships highly profitable.
Your best customers exhibit uncommon behaviors compared to the rest. They probably spend more time on your site, more money during each visit, and they most likely refer your brand and leave positive reviews.
To improve customer engagement, a few key strategies are:
Only the highest-performing ecommerce brands will be able to achieve all of these things, which will help their business gain a competitive edge that will be irresistible to shoppers.
Your customers demand the best. And you should strive to build an ecommerce brand and store that’s deserving of their hard-earned money.
The sad truth is: Not all customers are quality shoppers. What’s worse: Some customers are simply undesirable.
What is a bad customer? Bad customers commonly request frequent refunds and dispute orders through their credit card companies, which can lead to costly chargebacks.
Maybe they spend more time talking to support than they do purchasing items from your company. Worst of all, they might be verbally abusive toward your business or other customers.
While it’s easy to decide to let a buyer with bad behavior go, ask yourself the following questions before you blacklist anyone:
The answers to these questions can help you distinguish between challenging customers and bad customers. Challenging customers provide room for improvement, while bad customers are a lost cause.
As a store owner, it’s important that you treat bad customers with class and tact to preserve your brand’s overall reputation. Hopefully, too, this can help mitigate the backlash you receive from abusive customers you’ve let go.
Markidan offers a four-step process for doing this:
The most successful ecommerce brands obsess about customer lifetime value and combine customer success, marketing, product development and innovation, cost management, and pricing strategy to tackle issues they face with their AOV and LTV.
Hopefully, after you execute some of the aforementioned tactics, you’ll see an increase in your LTV, enabling your business to grow even faster moving forward.
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