Why You Should Stop Focusing on Ecommerce Conversion Rates and Switch to Customer Lifetime Value
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. And BTW customer lifetime value was one of the topics at Shoptalk conference.
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, successful 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 TweetBelow is a representation of a typical customer lifetime value calculation:
Source.
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.
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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.
You should also be aware of what are your customers willing to do to be qualified for free shipping to optimize your pages having that in mind.
Sean Marder, Director of Ecommerce Solutions at Kenshoo is a strong advocate of the discount strategy:
For advertising, and this may seem counter-intuitive at first, try advertising your lowest AOV item so it stands out as price-competitive in SERP. Then on your product detail page, have options for larger sizes or packs with incentives for conversion.
Speaking of packs – create a variety pack! Amazon is a great environment for shoppers to try new products that have a great reputation or have been attracted by outside advertising, but sometimes they don’t know what to purchase. A low-risk variety pack is a great way to introduce new customers to your brand at a higher AOV.
Not to mention that Amazon’s Subscribe and Save program gives discounts and incentives for repeat purchases, so to drive customers to your higher AOV products, activate S&S on your high AOV products/packs to make them more attractive.
In the screenshot of Amazon’s cart page above, you can see that two sections offering related products are included, with easy-to-click buttons.
Amazon offers the option to sign up for their Prime program before checkout.
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 email above from Audible.com uses data to make personalized recommendations.
Making good use of the available data is actually crucial. Let’s face it: making data-driven decisions rather than relying on your intuition is much more beneficial for your e-commerce business in the long run. By having customer data at your fingerprints, you can essentially figure out what makes them buy more and come back to your store – and make informed decisions based on that. Make sure you track purchase history and customer behaviour, though, also across the channels.
Max Melching, Online Marketing Director at Douglas emphasizes the importance of well-utilised data:
Data, Data and Data. As Douglas is the point of sale, we have a ton of relevant data points from e-commerce and offline store business as well. Thanks to our Douglas Beauty Card we can connect these data points and thanks to our DMP we can build segments and advertise based on them.
Imagine a huge brand launching a new fragrance – we can collaborate on a media campaign which targets Douglas customers who bought fragrances in a similar price range in the past but never bought a product of their brand before. The same concept works as well for use cases such as pushing AOV (up-selling) or CLV (reactivate inactive customers).
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:
One thing that keeps your customers loyal is the ability to make the most out of every purchase. If you broaden your portfolio and offer valuable “extras”, such as exclusive, educational content and responsive customer support after the purchase, you can easily influence their experience with your store. Especially if you offer special perks for the most loyal customers.
Andreas Rainer, CEO at A-Z Gartenhaus GmbH couldn’t agree more:
Based on our categories, our AOV is already very high. Still, we outperform our competitors by offering tailored accessories and a broad service portfolio. This increases our share of wallet, as customers are very pleased to buy everything fitting from a one-stop provider who understands their project.
Also, our very broad portfolio offers strong upselling opportunities. Our CLV is mainly increasing due to the strengthening of further categories. Our customers are relatively affluent homeowners and we can well predict which home and garden projects are still on their list.
Like many apparel retailers, Vanity Planet fosters a sense of community between customers, particularly on Instagram.
When you build your community you get to know your customers better. And being able to access customer data can not only help you determine what works and what doesn’t in terms of your marketing & sales efforts. This type of data also helps you understand your own customer better, and take action to meet their expectations – again and again.
As modern customers become much more demanding, though, you might want to add value to interactions with them and use personalization once you’re at it. In fact, the more you tailor your actions to specific customers, the more likely they are to stay loyal to your store.
Here’s what Tino Hartmann, CEO of Baby Sweets GmbH has to say about befriending your customers:
It’s absolutely necessary to know your customer. Being keen on efficient marketing campaigns for new customers is the first important step for building up your brand, but finally making new customers to recurring customers is sometimes more difficult than you might think.
Nonetheless, recurring customers know your brand, bring higher conversion rates and higher baskets at lower costs per re-acquisition. Best practice for increasing CLV/AOV is the intention when and how to get in touch with your customer after his first sale again — showing him the right products at the right time and via the right channel. All these data will lead to a 1:1 personalisation strategy for your company.
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 conversion 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.
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