How to Drive More Repeat Purchases by Calculating LTV
One of the most important steps in setting up an E-Commerce business nowadays is having a very clear idea of where exactly the target audience lies, and making sure all marketing efforts and budgets are directed only towards attracting, engaging, and finally maintaining that audience.
Whenever you want to market a product, the biggest mistake you could make is thinking that your product is for everyone.
If you want to succeed in the development of your business, you will have to define your ideal customers in as much detail as possible.
There are many reasons for online retailers to be optimistic about the future of online retail. A few of the reasons for online shopping becoming the preferred method include:
Importance of Target Audience:
Identifying a target audience is of prime importance to a budding business. Not having a clear picture of the buyer you are trying to hit translates directly to wastage of marketing and advertising resources, which otherwise would have resulted in positive exposure for the brand.
Basic SEO skills and a decent content strategy can win you as many as 100,000 random hits right away, but they would value less significant when compared with 500 qualified hits from users who are actually looking for your product or services.
This saves your time and effort into reaching out to a broader audience, and only looking out for potential customers. As a result, you can generate the same revenue with lesser resources, if you know what your target audience is looking for.
Here’s how to identify your target customers:
1. Create a customer profile
A customer profile is essentially a detailed description of your target demographic that includes:
Do your potential customers mostly fit into a Millennial age bracket? Or are they more often middle-aged or seniors? This is important, because customers in different age groups will respond differently to how your product is designed and marketed.
Remember how men are from Mars and women are from Venus? Generally speaking, their needs and goals are often strikingly different. If you promote your business in a way that fails to address these differences, you could end up attracting few people of either gender.
Knowing how much disposable income your customers possess should directly influence your marketing strategies. Low-income families may be drawn to products or services that help them save money. Customers in high-income brackets may respond more favorably to marketing that stresses on luxury and exclusivity.
The United States is a big country (let’s set aside world domination for now). Broadly speaking, the buying habits of urban residents often differ from those of people living in rural areas. Where people reside and the types of communities they live in influence their purchasing habits and preferences.
Other key characteristics include marital status, occupation or industry, families with (or without) children, ethnic groups, and hobbies and interests.
2. Conduct market research
You can learn about your target audience through primary and secondary market research.
Primary research involves learning about customer buying habits through direct contact, such as:
Distribute surveys to existing and potential customers via paper, email, or a web-based service like Zoomerang or SurveyMonkey.
Talk to people you trust and whose purchasing habits dovetail with your small business. At trade shows, for example, stand in a high-traffic area and ask people to answer a few short questions.
Get feedback from a small group of consumers who fit your customer profile through Q&A sessions and group discussions.
As part of your primary research, do you ever ask customers to fill out any forms when they purchase your product or service?
If so, they may be open to answering questions about their age, where they live, and specific purchasing preferences. Invite them to share information on a voluntary basis.
From these, you can assemble an initial customer profile.
There are also numerous mobile apps to help you collect important demographic data.
3. Reassess your offering and profile
With a comprehensive customer profile in place, the next step is to look at your products or services in a fresh light.
Given what you know about the target audience, ask yourself.
Which features and benefits are most likely to attract new buyers? Which may be of less interest or even actively discourage new customers?
Be honest with yourself. This analysis can lead to valuable modifications to your offering and yield new business.
You’ll also want to reassess your target audiences periodically. Every six months or once a year, conduct additional primary research and keep refining your customer profile accordingly.
As the marketplace shifts and evolves, your ideal clientele may change with it.
Get ahead of the curve to consistently reach your ideal buyers, and you’ll find yourself a step ahead of your competition.
One of the chief metrics that will help you evaluate and associate value to your customers is the Lifetime Value metrics.
The underestimated importance of LTV
The lifetime value (or LTV) of your customers is probably one of the easiest of your metrics to calculate, but many overlook its importance.
With inbound marketing automation in place, most of the information is gathered for you and delivered with a nice little bow.
It’s what you do with that information that sets you apart from your competitors.
So, why is the LTV so important? Many people throw around the term “ROI” or Return On Investment without actually knowing what it means.
ROI is an oversimplified concept that’s actually asking for a ratio of how much you get back versus how much you invested.
The key concept missing from most marketers’ perspectives on ROI is that, although we know intuitively that the goal is to develop lasting relationships with consumers, it’s not a metric that most E-Commerce marketers track, and therefore isn’t a metric that they can work on improving.
If you’re trying to calculate your “ROI” but just modeling the individual sales you get from your investment instead of looking at the value of customers you acquire and nurture, you’re missing out on the big picture.
When calculated correctly, you’ll know how much your customers spend, how often they spend it, and what kind of programs and perks inspire those buyers to become regular customers.
In other words, you can use the metrics to make your customers happy.
Done right, knowing what kinds of customers have the highest LTV can help you determine where your company should invest for growth.
Also, tracking this metric and the influencing variables helps you figure out how to affect those variables and improve this key metric.
How to Calculate E-Commerce LTV?
While this metric may be the simplest to calculate, it’s also one that may involve more variables than you’re used to.
There are multiple ways that companies use to calculate LTV, but on the most basic level you should focus on a formula with variables that you know how to influence, so that this metric becomes actionable for you.
Your basic formula is the following:
(Average Order Value) x (Number of Repeat Sales) x (Average Retention Time)
The infographic from KISSmetrics regarding the LTV of a Starbucks customer breaks down every step of the formula. The first step shows how to average your first variable, the average sale.
The next step shows you the number of visits per week, or the number of repeat sales.
When these averages are plugged into the formula and a time supplied, we can see the lifetime value of that customer for the particular time given.
In the case of this infographic, the time value supplied is one week.
The infographic also shows the massive importance of measuring and optimizing for LTV.
Have you ever wondered why there are so many Starbucks branches? Or why they have free wi-fi and comfy couches?
It’s because the Starbucks marketers know that they’re not trying to sell a $5.90 cup of coffee — they’re trying to acquire and maintain a $15k customer. That simple math trick changes a lot about how you approach your marketing.
Why Should You Care About Customer Lifetime Value In Your Marketing Plan?
Customer Lifetime Value is an overlooked, underappreciated metric. Being involved with business, I’m sure you’ve heard that repeat customers spend, on average, 67% more than new customers.
What’s worse for you marketers out there is that those new customers, who don’t spend as much, also cost up to five times more to acquire than bringing in a repeat customer.
In essence, the more you increase your CLV through your marketing, the less you spend on acquiring new customers = the more money you make.
Sounds good, right?
That’s exactly why you should care about cool abbreviations like LTV and CLV marketing. Your marketing efforts should focus more on retaining and growing your current customer base, as opposed to acquiring new customers.
That’s easy in theory. But how does one actually implement CLV marketing in their marketing strategy?
First, you must calculate your business’ CLV.
How To Calculate Your CLV
There are a million different ways to calculate this important metric. It seems everyone with a big name in the business world has their own formula.
CLV is calculated by taking 3 simple stats across a few customers and plugging them into an equation:
– Average order value
– Average purchases per week (or month, year, etc.)
– Value per week (or month, year, etc.)
You simply need to take a handful of customers (the example used five), take how much they spent on their order and the average over a set amount of time (like a week), then multiply those together to get their average spend for that amount of time.
From there it’s simply a matter of plugging those numbers into the equations (along with figuring out some constants to plug-in as well).
Customer Lifetime Value is an important metric to look at when considering where to invest your marketing dollars. It’s easier to invest in the people who are already buying from you than to get strangers to notice you – and more rewarding, too!
Once you’ve calculated your CLV using the formulae provided above, figure out those key customers worth their weight in gold and go after them relentlessly. Don’t drive them away, of course – just treat them extra nice.
- Know your customer, wear their shoes to know what their requirements are. Understand them to identify them.
- Map your consumer through primary and secondary market research
- Don’t forget LTV and CLV – loyalty is where the money lies.
This article is part of a full series eBook: The Ultimate Guide on Starting Your E-Commerce Store. To read the full eBook click here