The Art and Math of Optimizing Customer Lifetime Value

The Art and Math of Optimizing Customer Lifetime Value

One thing is certain for eCommerce entrepreneurs: Your customers are your greatest asset. While incoming sales are to be celebrated, the true value lies in the ability to earn from one customer for the rest of their lives.

It’s vital to understand your online shop‘s metrics, KPIs (bounce rates and click through rates, conversion rate, average order value, add-to-cart ratio), but the best eCommerce business owners don’t just focus on short-term goals. They instead focus on the long-term goals of retaining loyal customers and increasing their lifetime value.

This video session features Liat Karpel Gurwicz (Head of eCommerce Marketing at Wix), who walks us through the Math and Art of Optimizing Customer Value.

What’s the customer lifetime value (LTV).

Customer lifetime worth or LTV, is the estimated revenue you will earn from a customer or segment of customers over a specified time period. (Their lifetime as customers).

Why customer lifetime value is important?

“By focusing upon returning customers and their lifetime worth, you provide your business with a North Star for growing profits.” – Liat Gurwicz Head of eCommerce Marketing, Wix.

To build a successful eCommerce company, it is important to keep your customers happy and continue to spend money with you.

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We invest time, money and resources in acquiring new customers as eCommerce merchants. LTV (the amount of money a customer spends with us over their lifetime) can help us determine how much to budget for new customers and how much to keep the ones we have. You can quickly see if your customer spending is too high and, if not, you can redirect your money elsewhere.

Profits will rise if you increase lifetime value. This gives you an accurate idea of the customer’s worth, which allows you to plan your marketing investments to maximize your profit margin.

The Math: Calculating the customer’s lifetime value

There are many ways to calculate customer lifetime value. Some models have challenges. However, ultimately, it is up to you to determine which method works best for you.

Karpel Gurwicz guides us through the process of calculating in this section.

  • Customer lifetime value. The estimated revenue you will earn from a customer or segment of customers over a certain period.
  • The return on your investment. How much you make from every customer that you acquire. To calculate this, it’s also necessary to look at your customer acquisition costs: How much it costs to acquire a customer.
  • Customer value based on a cohort. Value brought in by customers who bought your products within the same time period. To make customer value calculations actionable, it is important to determine how fast you will be able to achieve that value in a given time period.

It is worth noting, however, that cookies may be less sensitive and accurate than login mechanisms to identify customers. When calculating your lifetime value, please consider this.

The Art of Increasing Customer Lifetime Value

“Everything we do to optimize sales and get customers buying more must be geared towards actually providing value to them.”

Liat Karpel Gurwicz is Head of eCommerce Marketing at Wix.

It is a fine art to increase customer lifetime value. It is important to consider the areas that you wish to improve it. It could be to increase average order value, drive repeat business, or just build customer relationships. But ultimately, you must provide value to the customer throughout their entire journey.

Karpel Gurwicz, a session organizer, discusses the importance of knowing your customer and the best sales strategies to target them. He also gives examples of users who have succeeded in doing just that.

  • Upselling. Encourage customers to purchase a similar, superior product that is more expensive than the one they are actually considering.
  • Cross-selling. Incentives customers to purchase related or complementary products to those they already own.
  • Bundling. Bundling a product with similar products to sell at a discounted price.
  • Subscriptions. Subscriptions are a way to increase your income stream through your product fans.
  • Gift cards. Gift cards can be used to increase cash flow and generate revenue immediately. This revenue is available regardless of whether the gift cards are used.
  • Chat live. It can be a great way to communicate with customers at crucial stages of their shopping journey.
  • Email marketing. Regular emails with discounts and product announcements will keep you top of mind.
  • Automated email. Automated emails can encourage customers to return to your website using automations such as abandoned cart recovery, post-purchase thank you emails, or sending discount codes for new subscribers.
  • Loyalty programmes. Encourage customers to engage with your brand. Reward them by offering loyalty-based third-party apps such as Smile.io.

LTV Models – The Challenges

The cornerstone of measuring customer worth and building profitability is customer lifetime value.

You use it to strategize how you can bring in relevant shoppers, pay acquisition costs, and return marketing investment. This will allow you to re-invest the money and bring customers. You use it long-term to increase customer value and revenue to build your company and continue optimizing and increasing profitability.

It is important to remember that LTV models have their challenges. Customer acquisition costs, conversion rates and retention rates (or Churn rates), all change over time.

To be able to calculate customer value, it is important to understand how fast you can achieve that value within a given time frame.

Wix doesn’t use LTV models when optimizing marketing investments to customer acquisition.

We use TROI, which is Time to Return on Investment. This metric is the time taken to collect new premium subscriptions in a cohort. It should be equal to the amount spent on direct acquisition marketing in that cohort.

Wix is a SaaS platform that has over 200 million users around the world. This makes our business a bit different from other eCommerce businesses. Focusing on great products and conversions over the long-term results in increased monetization of user cohorts through cumulative collections. This also results in more efficient marketing, as we do not invest in ongoing marketing but instead make one-time investments.

No matter whether you’re measuring LTV or Total Return on Investment, your customers are your greatest asset. You have the potential to earn from your customers for a lifetime. Make sure everything you do relates back to how you can add value and optimize for it.

source https://www.wix.com/blog/ecommerce/2021/07/optimizing-customer-lifetime-value

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