Last updated on 07/13/2022
This article will help you understand when and how you can scale your e-commerce brand and still be profitable. Indeed, improving the Customer Lifetime Value (CLTV) of your e-commerce site is the ultimate challenge to significantly increase your profitability and become a sustainable business at scale.
Instead of focusing on optimizing your customer acquisition strategy impacted by rapidly rising digital marketing advertising costs, focusing on retaining your existing customers becomes essential.
Customer lifetime value formula
Customer Lifetime Value – Customer acquisition cost = Value creation
Customer Lifetime Value = Retention Rate/Average purchase rate per customer (purchases per year) x Average order value x Gross product margin* (%)
*transaction costs and shipping costs included.
As a general rule, your e-com business is viable when the LTV of your customers is at least twice as much as the average Cost of Acquisition with a 2:1 ratio, 3:1 is great and more comfortable for your business.
Example:
Total website traffic during the year = 120,000
Average monthly traffic = 10,000
Conversion rate on your website = 3%
Average Monthly Acquisition = 300
Average monthly digital marketing spend = $5,000
Average customer Acquisition cost = $5,000 / 300 = $16,6
—
Average Item Value = $30
Average Items per transaction = 2
Average order value = $60
Average purchase per year = 2
Gross profit margin* = 40%
Customer lifetime value (1 year) = (602)0,4 = $48
Customer acquisition cost x2 = $33,2
Customer Lifetime Value = $31,4
Theoretically only, you should reduce your cost per acquisition or increase retention rate, AOV, or gross profit margin to be able to scale your business.
In reality, you can scale because you are really close!
if your average purchase per year was 1, meaning your clients buy only one time from you during an entire year, then your customer lifetime value will be $24.
In this context, you should improve some parts of your business before scaling.
Build a strong online community
It is a determining element to improve your Customer Lifetime Value and many other things in your business, such as creating a real brand asset that will be highly valuable.
We have dedicated a whole article to the creation of a strong community here.
Improve your customer retention strategy
Customer retention refers to the ability to get a customer to come back, repurchase, and improve each customer’s profitability over their lifetime.
The churn rate is the rate of customers who have decided not to buy from your online store, unsubscribe from your newsletter, or not return to your website.
Why is the retention strategy important?
Saves money
A good customer retention strategy saves you money because customer acquisition usually costs x5 to x25 more than retaining a customer with a repurchase.
Increases profit
Customers will have less difficulty spending more because they know that your products are high quality and valuable.
Get new customers for free
You probably know how powerful word of mouth is. Your customers will talk about your brand through a customer referral program or for free.
The relationship you have with your community and your customers will greatly improve your customer retention.
Concrete examples to improve customer retention
Customer support
Unhappy customers can be turned into true ambassadors of your e-commerce brand if your customer service is good.
Remember that all stages of the customer experience are important. Don’t neglect post-sales support in favor of pre-sales support to acquire new customers.
Unsatisfied customers who will ask for a refund if they are not comfortable with not getting a response from customer service within 3 days will cost you more.
Setting up a live chat on your website will also allow you to assist customers in their purchase process, inform them quickly, and get direct feedback.
Example of great customer support: Zappos
This clothing e-commerce website is extremely well known in the digital world for its exceptional customer service. Search “Zappos customer service experience” on google to see the countless articles about the company with their customer service.
They spend a fair amount of time making sure their customers have a perfect experience with their brand and a great day after their customer service call.
Email marketing
The email marketing strategy is probably the most profitable for you, if executed well.
Send emails that provide value and are personalized based on where customers/leads are in their buying journey.
Email flows can be sent when the lead has given their email to receive your newsletters.
Some of your customers don’t like to receive emails from brands, that’s just the way it is. On the other hand, some love to receive new products, new offers and customer discounts directly in their email box. You write your best emails for them.
Marketing automation applied to your CRM and emailing database is a powerful strategy for customer retention for your emailing campaigns.
Try to personalize them a bit to make the emails more unique, and keep in mind that your customers will read them on mobile, so make sure you optimize them accordingly.
If you need some inspiration, sign up for email lists of your competitors or e-commerce brands that you like as a customer.
Loyal customers special offers
Extra-miles experience is giving a customer more than they expected.
Segment your loyal customers who spend the most on your e-commerce website and reward them with exclusive and privileged offers.
For example, you can send them a free gift with their next order to thank them for their loyalty. You can also send them a promotional code or the possibility to reserve a new product if you are often quickly out of stock with a unique pre-access link to your product page.
Customers love this kind of attention (everyone does, even you and me) to get exclusivity and the principle of reciprocity will apply.
If you send a handwritten note, you can potentially create loyal customers for life, this is called the extra-miles.Example: Sandro, a French clothing brand offers exclusive access to their loyal customers few days before the sales starts.
The loyalty program
The loyalty program is extremely interesting to increase the repeat purchase rate. Many e-commerce brands have these programs on their website for their customers to encourage them to buy more often. Points systems are the best known.
These offers can really increase the AOV and LTV of your customers.
“L’Oréal, for example, encourages its customers to sign up for its online loyalty program Worth It Rewards. The more information subscribers offer, the more rewards they receive in return. Over time, product recommendations and offers become more targeted, incentivizing subscribers to buy more, which provides L’Oréal with more information—a virtuous cycle.” Mc Kinsey
MVP access and VIP code
Your customers expect unique codes and discounts for their future purchases naturally because other brands offer this. MVPs as VIP customers with premium and limited access reinforce their sense of brand ownership.
Be careful to provide customers with a unique customer experience.
Successful VIP programs are a testament to a brand’s ability to express appreciation for a customer and provide them with the right kind of experience. The programs require a deep understanding of what the customer values and how they want it delivered.
Example the famous Nike’s “NikePlus” Program.
Contests and giveaways on social media
Contests and giveaways on social media are for customers and followers as well. it is becoming more and more popular. It allows you to get massive engagement on your social posts, by offering a free reward in exchange for doing 1 to 5 quick actions that cost nothing to the users.
The benefits of these contests are that you get an organic boost from the algorithm as it sees your post generate a lot of engagement. So you have more visibility in a very short time, get new followers, and potentially go viral.
The downside is that on social media, many fake accounts dedicated to giveaways exist. That’s why Facebook and Instagram no longer allow them in all their forms. For example, posts can no longer be boosted in paid ads if the Facebook bot identifies it as a giveaway.
If you are running this type of contest, make sure you have the resources to be able to run the contest. Excluding fake accounts takes time. Look at the results and do it in the most legal way possible by explaining the contest rules to participants. And consider announcing the winners on social media, as participants expect it from you.
Develop your business model
Developing your brand product range by offering your customers new products can increase their lifetime value. By ensuring a successful launch and pre-orders.
For example, you can launch consumable products with recurring purchases and offer a monthly or annual subscription model.
Consider consumable products as repeatable purchase.
The e-commerce brand Waterdrop started by selling eco-friendly reusable water bottles in stainless steel and glass.
They then realized that their customers wanted to drink something other than water, such as sugar-free flavored drinks.
So Waterdrop created micro-drinks to add flavor and vitamins to their water, without added sugar.
They then created bundles with the bottle to increase their customers’ AOV.
Turn shoppers into repeat buyers with a subscription model.
Monthly or annual subscription models can help you build customer loyalty and remove the need to purchase a recurring product continually.
Subscriptions allow you to create a recurring order customized to your customer base’s needs. This not only increases your revenue but also builds brand loyalty over a long period of time.
Example: The razor market has started to offer this type of subscription model with Dollar Shave Club, Harry’s, and then Gilet.
Beauty monthly boxes like Boxcharm are also a subscription business model.
How to measure the success of your customer retention strategy?
Calculating your AOV and your repeat customer rate will allow you to evaluate the value of your customer retention.
The higher these metrics are, the more profitable your e-commerce brand will be and the more you will be able to scale without worrying about low margins.
- AOV = Revenu / Numbers of order
- Repeat customer rate = Customers who have purchased more than once / unique customers
- AOV x purchase frequency = Customer value
Sources:
https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/dtc-e-commerce-how-consumer-brands-can-get-it-right
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