5 Lifecycle considerations for your E-commerce business
02 Apr, 2019
By Milan Blazevic, Director ANZ, Crimtan
Working within ad technologies over my career has helped me acquire a comprehensive understanding of the effects that various lifecycle strategies have on e-commerce businesses.
What I’ve found is that no matter the size of the business there are often simple changes that can be made to help improve the success rate of acquiring new customers.
Here are 5 Lifecycle considerations for your e-commerce business.
1. Understand the role of LTV
Why is it important to know the lifetime value of your customers?
LTV is the total value ($) a customer will contribute to your business over their lifetime.
LTV helps you understand what you can spend to acquire a new customer without losing money. And, it gives you a reference point to help you make changes to increase the value of each customer through lifecycle marketing.
According to the Australian Bureau of Statistics, more than 60 % of small businesses cease operating within the first three years of starting. And most of these businesses fail because they do not understand their customer’s lifecycle value.
Your AOV (average order value) might be $70, however, if you’re paying $150 to maintain or acquire those customers then you are going to run into problems quite quickly.
It’s essential to keep track of your LTV as it should influence how you communicate to your customers across their lifecycle so to ensure they continue to spend, and just as importantly increase their AOV (Average Order Value).
2. New vs Existing Customers – Which to prioritise?
A common theme across various e-commerce and business growth books (I recommend Zero to One by Peter Thiel) is that there is an idea that the probability of selling to a new prospect is 5-10%, while the probability of selling to an existing customer is 60-80%.
You would assume this would mean that you should focus primarily on existing customers across your lifecycle marketing planning? By doing so, in the short term, you may maintain your LTV which would ensure a baseline of sales to remain operational.
However, the dangers of this are that the quality and size of your audience lifecycle funnel can begin to dilute over time. Even if you retain 80% of your customers each year, the overall value will eventually begin to drop. Especially with external factors such as completion come into play.
3. New Customers Acquisition – How to determine if you are succeeding?
To do so, you need to factor in the ‘Customer Acquisition Cost’ (CAC) associated with new customer acquisition.
Let’s look at a simple example to see how effective someone is at acquiring new customers.
Milan’s Croatian Cakes acquires 1,000 new customers spending an AOV of $80. We spend $30,000 on various marketing campaigns (display, social, search) to help reach those new customers. The operational cost for filling each of the orders is $50. Our customer retention is 70%.
Is the above new customer strategy succeeding? To figure this out, we need to work out the ratio of lifetime value to customer acquisition cost.
To do that, let’s work out our Customer Acquisition Cost:
- $30,000 (marketing) / 1,000 (customers) = $30 (CAC)
Determining the Lifetime Value (LTV):
- $30 / (1 – 70%) = $100 (LTV)
With this information we can gauge whether we are succeeding with new customers acquisition as we can now determine our ratio by taking the LTV and dividing it by the CAC.
- $100 (LTV) / $30 (CAC) = 3.3x index
Milan’s Croatian Cakes has a ratio of lifetime value to customer acquisition cost of 3.3 our baseline.
As a bonus, we can take the Customer Contribution Margin (CCM) from our example and determine how profitably of those yummy Croatian Cakes.
- $80 (average order value) – $50 (order costs) = $30 (CCM)
By utilising the above, you determine how effective you are (and have previously been) with acquiring new customers and maintaining profitability.
4. When to think about ROAS?
Customer acquisition cost is directly impacted by the ROAS of your lifecycle marketing spend.
What is ROAS and how do you work it out?
Return On Advertising Spend is simply the revenue from the ad campaign/cost of the lifecycle ad campaign.
A lower average ROAS will mean less new lifecycle customer acquisition for the same ad spend and it will impact your CAC. Eventually, as your customer base begins to shrink so to will your LTV and things become dangerous for the future success of your business.
When you spend your business resources on an ad, the goal is to make sure that ad produces as much revenue as possible.
Thus, it is vital to have the right advertising strategies in place.
5. What are the right strategies?
Before a dollar is spent on advertising you first need to ensure your website is correctly set up across your floodlights (Tag Manager), CRM and other analytic tools.
Here are some considerations:
There are still many e-commerce businesses not tracking and maintaining their Data Layers correctly.
It is important as it allows you to track data points such as the product names, prices, basket quantity, and etc so you can make informed decisions on how your customers are engaging with your store and thus how to better communicate with them across their lifecycle.
Understanding your audience lifecycle behaviour:
To target the right people at the right time with the right message you first need to understand who the right people are? So, to help inform you what will be the best message at what time!
If your current advertising strategy is to simply retarget every user that has looked at a product page or added something to the cart then you are not learning as much about your audience’s behaviour as you can.
If your business is selling Croatian Cakes online then perhaps you should consider:
- Where are my customers purchasing my cakes at a geo level?
- Is there a relationship between product and geo?
- Which cake is selling better than others?
- What factors are influences product purchases (weather, affluence, etc)?
- How much is you average basket value vs final sale?
- Can you offer any incentives to drive a larger transactions? If so, where and when?
There are so many variants your customer lifecycle partners should be consulting you on.
If you would like to find out more, please email or phone your local Crimtan office.