Are you Calculating your Customer’s Lifetime Value?
Understanding the value of an average customer is really important when setting KPIs on a campaign’s ‘cost per acquisition’.
Nothing stifles a campaign like under investment, and it’s all too common to trim back the potential of your ads by not understanding the true value of your customer.
Let’s say that your e-comm product sells for £35, and you are happy with an acquisition cost of 25%. That leaves you with a cost per acquisition (CPA) KPI of £8.75. But if you discovered the average value of a customer over twelve months, once they had come through your virtual doors, was actually £173, you now have £43.25 to work with.
So when HelloFresh offer 50% off the first box and 35% off the next three boxes - you can assume that with the discounting and costs of advertising the acquisition cost is fairly high, but they clearly not only know their LTV but they know that if they can hook a customer in for 4 weeks then they are likely to retain them for the long term, short term pain for very long term gain!
It’s not about being flippant around the costs of your ads campaigns, but about having the opportunity to throw your net wider. With more budget you can test more platforms, different offers etc, giving you the scope to bring in more customers and see quicker growth.
And what comes with quicker growth and more customers? An e-comm business scaling well with good customer satisfaction will see a steady increase in their LTV.
How do you calculate your average customer LTV?
There’s more than one way to do this calculation, but to keep it simple we recommend taking your average order value and multiplying it by the average number of purchases customers are making (AOV x average purchase frequency). Depending on the nature of your business and customer purchasing patterns, take data from the last 6-12 months then repeat each quarter to review the value.
Subscribers
Knowing your own business, it’s up to you whether you want to include subscriptions in your LTV calculation. If you run separate campaigns for subscribers, or want to err on the cautious side, we’d recommend leaving them out of the calculation. However, if subscribers are a core part of your customer make up, they probably have a place in the calculation, particularly if you have a good success rate converting one time buyers to subscribers.
How do you increase your LTV?
In a nutshell:
Good customer satisfaction
Good email nurture
Good community nurture on socials
Good retargeting campaigns
Bringing new customers into your business requires investment, holding onto them should take less. Driving up the average customer LTV is a wise priority for any scaling e-comm brand.
Need some support in this area? Book in for a discovery call with us, we’d love to help.