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.

The One Crucial Metric – CLV (a.k.a LTV) – You Need to Focus On

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.

Customer Lifetime Value Definition

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

How to Calculate Ecommerce Customer Lifetime Value – the formula

Below is a representation of a typical customer lifetime value calculation:
Lifetime Customer ValueSource.
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.

How to Boost Lifetime Value (LTV)

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.

1. Grow the Average Order Value

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.

  • Offer threshold-based free shipping – Conditional free shipping, which is activated by an order of a certain value, encourages customers to add more products in order to reach the threshold.
  • Offer price-variable discounts and free items – Reward customers with discounts and “freebies” whenever they buy a large quantity of items. You should always offer incentives for very large bulk orders.
  • Optimize your cart page with items “saved for later” and related products – Are your cart pages – where customers review their products before checkout – optimized to encourage further purchases? Do you include images of items that are related or “saved for later?” Can items easily be added to the cart with one click?

Amazon online store cartIn the screenshot of Amazon’s cart page above, you can see that two sections offering related products are included, with easy-to-click buttons.

  • Include upsells and cross-sells – Upsells offer customers the option to buy a higher-end version of the product they’ve chosen (usually with extra or add-on features) while cross-sells offer related items. Include these on the product page and any intermediary pages leading up to checkout.

Amazon checkoutAmazon offers the option to sign up for their Prime program before checkout.

  • Use scarcity and urgency to encourage customers to add more products – Do your product pages build urgency and scarcity? Both are essential for encouraging customers to make higher-value purchases. Are sale end times clearly highlighted, for example? Do you notify visitors of low stock levels? Are limited edition items labeled as such?

2. Grow the Repeat Transaction Average

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:

  • Offer next-order discounts and promotional gift cards – After a customer makes a purchase, reward them with a next-order discount or even a money-off guarantee in the form of a gift card.
  • Allow customers to save products – By allowing customers to save items for later, you will build up a repository of products you know they’re interested in. You can then remind them of saved purchases at a later stage.
  • Segment as though your life depends on it – Segmentation is hands-down one of the best ways to boost repeat transaction frequency. When you segment your customer base – by interests, country, order frequency etc. – you can pitch them highly-targeted and relevant content, offers and promotional campaigns.
  • Offer discounts and promotions based on previous purchases – Collect data about previous purchases to ascertain the interests and preferences of your customers, using it to shape your outreach campaigns.

Ecommerce recommendationsThe email above from Audible.com uses data to make personalized recommendations.

  • Utilize retargeting campaigns – Retargeting campaigns, built on data about customers’ previous behavior, are immensely effective in encouraging repeat purchases. Facebook’s ad platform, for example, offers a huge array of data-points for targeting customers – from specific pages they visited on your site to their general political interests.

3. Grow the Retention Period

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.
Customer Lifetime Value - returning shoppers stats

Return #customers account for 33% of all sales. #ecommerce #EcommerceStats Click To Tweet

We recommend three main ways to increase an ecommerce store’s retention period:

  • Commit to optimizing your loyalty programMost successful ecommerce retailers have an effective loyalty program. Amazon’s premium loyalty program, Prime, led to a boost in revenue of 460%. Consumers are hungry for loyalty programs. By building and optimizing one that effectively listens to and meets their needs, you’ll be leveraging one of the most powerful tools you have to maintain long-term relationships with customers.
  • Build a community (e.g. on Instagram) – Encouraging customers to stick with your brand is all about prompting them to form a connection with you. One of the best ways to do this is to build an active community, in which people are likely to share and participate.

Ecommerce communityLike many apparel retailers, Vanity Planet fosters a sense of community between customers, particularly on Instagram.

  • Test the effectiveness of your regular outreach – When was the last time you measured the engagement and click-through rates of your outreach channels? Content that performs well is key to keeping customers interested over the long-term. By optimizing your newsletters, Facebook posts, app push notifications etc. you will boost engagement and thus retention.

Conclusion

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.

Want to build a complete optimization plan that covers all the bases?

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.


Growcode Ecommerce Blog / Ecommerce Optimization / Why You Should Stop Focusing on Ecommerce Conversion Rates and Switch to Customer Lifetime Value

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