5 Lifecycle considerations for your e-commerce business
02 Apr, 2019
Witten by Milan Blazevic, Commercial Director ANZ, Crimtan
Working within ad technologies over my career has helped give me 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 many simple changes that can be made to fundamentally change how successful they can be.
So here are five considerations for e-commerce businesses.
- Understand the role of LTV
After almost 10 years in marketing, it still surprises me how often many clients cannot tell me what the lifetime value of their customers is?
So, what is an LTV?
Well, it is the total value ($) a customer will contribute to your business over their lifetime.
Why is it important to know the lifetime value of your customers?
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 lifetime value.
Your AOV (average order value) might be $70, however if you’re paying $150 to maintain or acquire those customers then you’re going to have a bad time very quickly!
So it’s essential to keep track of your LTV as it should influence how you communicate to your customers across their customer lifecycle. And you can ensure they continue to spend and, just as importantly, increase their AOV (Average Order Value).
- New vs Existing Customers – Which to prioritise?
A common theme across e-commerce and business growth books (I recommend Zero to One by Peter Thiel) is that the probability of selling to a new prospect is 5-10%, while the probability of selling to an existing customer is 60-80%.
So does this mean you should focus primarily on existing customers in the growing LTV stage of the lifecycle marketing and planning?
By doing so, in the short term, you can maintain your LTV and even perhaps upsell on their AOV which ensure a baseline of sales to remain operational.
However, the dangers of this are that the quality and size of your audience can begin to dilute. Even if you retain 80% of your customers each year, the overall profitability will eventually begin to drop. Especially when external factors such as completion come into play.
- New Customer 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.
- When should you think about ROAS?
Customer acquisition cost is directly impacted by the ROAS of your lifecycle marketing spend.
So 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 ad campaign.
A lower average ROAS will mean less new 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 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.
- 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 essential considerations:
The largest issue I’ve seen with many e-commerce businesses is that they are 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 customer lifecycle.
Understand your audience behaviour for successful lifecycle marketing
To target the right people at the right time with the right message you first need to understand who the right people are. This will help inform you what will be the best message at what time.
If your current media plan is to just retarget every user that has looked at a product page or added something to a cart, then you are not learning as much about your audiences or how they behave.
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 lifecycle marketing partners SHOULD be helping you consider. We have only touched upon a few points and if you would like any further information on strategies that could help your business contact your local Crimtan office. Also, check out our blog on six things savvy e-commerce retail brands need to embrace this year.