As an online retailer, you’ve probably conducted dozens or even hundreds of split-tests. You know that optimization testing needs to be woven into the fabric of your business. And you’ve seen the boost in conversions and revenue that a good split-test can bring.
But what if you’re using the wrong metric to measure success?
At Growcode, we’ve worked with hundreds of ecommerce retailers. And in the vast majority of cases, their approach to optimization has been incomplete. They suffer from what we call “conversion rate tunnel-vision”. Every test they conduct is based on how well it boosts conversion rates, with little or no focus placed on other metrics.
The problem with this approach? It provides only a snapshot of a much bigger picture.
In this post, we’re going to take an in-depth look at other metrics you should be taking into account. Specifically, we’ll give you the exact customer lifetime value formula we use at Growcode to dramatically boost our clients’ revenues.
Let’s dig in!
Growcode also recommends this eBook:
Ecommerce Optimization Checklist of a 7+ Figure Online Store
When you’re conducting your next split-test, which metrics should you focus on?
Along with conversions, it’s crucial to bring “Customer Lifetime Value” into your split-testing mix. A growing average lifetime customer value is one of the best indicators of a “healthy” and growth-oriented ecommerce business.
The term “Customer Lifetime Value” (LTV) refers to the average value a customer provides through the course of their entire relationship with you. It’s dependent on average order value, retention rate, and repeat order average.Customer Lifetime Value refers to the average value a customer provides through the course of their entire relationship with you. #ecommerce #optimization #CLV #CRO Click To Tweet
Below is a representation of a typical customer lifetime value calculation:
One look at the equation above shows there’s more to optimization than simply boosting ecommerce conversion rates. Let’s take a quick look at the individual metrics and define CLV meaning more thoroughly:
Single sale average – The average value of a single sale made to your customers.
Repeat transactions average – The average number of times a customer will make a purchase over a given period.
Retention period – The period of time that a customer stays active and loyal to your brand. This is not the same as customer retention rate, which is essentially a measure of “churn”.
No, let’s dig into an example of customer lifecycle value calculation. If your “single sale average” is $80, your “repeat transactions average” is 2 orders per year and the average period of time customers stay active is 2 years, then your lifetime customer value = $80 × 2 × 2 = $320.
So here’s what you need to know in a nutshell: if you want to boost your overall revenue, you should focus on boosting client lifetime value.
So how do you go about doing that? And how should you structure your split-tests to improve this key metric? Let’s look at the three most important ways.
Following on from the customer lifetime value equation above, there are three clear ways to boost lifetime value. A multi-faceted approach is best – one that aims to test and improve “average order value” (single sale average), “repeat transactions average” and “retention period” at the same time.
Let’s take a look at each in turn.
It’s possible to increase average order value in two ways: by encouraging visitors to purchase more expensive items or a greater number of items in a single order. The best strategy is to aim for a mix of both.
While there is a significant disparity between industries, research shows that top-performing stores have an average order value in the region of $100. What’s more, increasing average order value is often a simple matter of making several small tweaks.
The term “repeat transaction average” refers to the number of times a customer makes a purchase over a specific period of time. Improving this metric is all about reaching your customers with strong incentives and offers after their first transaction.
It goes without saying that you should always encourage your customers to provide you with as many communication channels as possible – email, physical address, social media etc. – in order to most effectively capture their attention.
Consider utilizing the following strategies:
The term “retention period” refers to the period of time that a customer “stays” with a brand. It differs from “repeat transactions” in the sense that it measures the period of time that a customer continues to purchase, rather than the number of purchases. It’s also called the “average customer lifespan“.
That said, there is a sizeable degree of overlap. Working to boost repeat transaction average will often positively affect retention period and vice versa. It’s important to remember that return customers account for 33% of all sales. The longer you can keep your customers, the better your bottom line will fare.
We recommend three main ways to increase an ecommerce store’s retention period:
Running an ecommerce optimization campaign is hard work. But don’t despair. Just because there are lots of moving parts doesn’t mean that you need to invest hours of manpower and mountains of cash into a major site overhaul.
With the three ecommerce optimization metrics above in mind, it’s possible to take a long-term approach, conducting lots of smaller A/B tests. This is the strategy Amazon use, along with a host of major ecommerce players. And the results speak for themselves.
In this article, we’ve provided you with one piece of the ecommerce optimization puzzle. But what about everything else? Product pages, cart pages, checkout pages, your homepage – they’re all essential.
If you’re eager to ensure that all parts of your optimization strategy are in working order, then get yourself a copy of our in-depth eBook: Ecommerce Optimization Checklist of a 7+ Figure Online Store.