Solving growing pains by improving customer lifetime value – Lever 4 – LTV
A customer has much more value than just their first purchase. It’s wasteful to invest in marketing, paid advertising and influencer campaigns just to discard them once they’ve checked out for the first (and possibly last) time.
In the final installment of our series on how to build long-term growth in eCommerce we look at the fourth lever: Customer Lifetime Value (LTV).
What is LTV
Customer Lifetime Value represents the total revenue a customer is expected to generate throughout their entire relationship with a business – it includes not only the immediate transactional value but also factors in repeat purchases, upsells, and referrals over time.
Why optimise LTV?
Pinning your hopes on bigger ad budgets to boost revenue is akin to shovelling cash into a bonfire; at some point, the dwindling returns render it an unsustainable strategy. The first blog in our series goes into more detail about the diminishing returns of paid advertising as brands mature. So why LTV? Here are some facts which might make your ears prick up :
- Acquiring a new customer costs seven times more than retaining an old one [source]
- The probability of a previous customer making a repeat purchase is 60-70%[source]
- Increasing customer retention by 5% increases profits by 25-95% [source]
Many of the eCommerce businesses we partner with are on their way up. We see first-hand the challenges they face as they try to scale – one of which is maintaining profitability. In short, keeping hold of customers and compelling them to buy again is a hugely powerful way for growing eCommerce brands to boost revenue – without the implication of further acquisition costs.
Metrics that influence LTV
Lifetime value is calculated and dependent on several other metrics including Average Order Value (AOV), Customer Value, and Purchase Frequency.
Other metrics that are influential to LTV include:
- Returning Customer Rate: What percentage of customers make a repeat purchase?
- Time To Next Purchase: What is the average amount of time between a customer’s first and second purchase?
- Channel Growth and Engagement: The growth of your social channels is a key indicator of loyalty.
Leveraging data
Data is the empirical way to manipulate the metrics that influence LTV.
In the third installment of this blog series, we discussed strategies to increase Average Order Value (AOV), such as offering discounts, creating bundles, and implementing upselling and cross-selling techniques.
Additionally, personalising offers based on customers’ purchase histories presents another effective strategy. Historical purchase data can be fed into retargeting campaigns and targeted email marketing, making them more relevant and effective.
Loyalty unlocks LTV
The goal is to cultivate a community of people that not only purchase your products but also become fervent ambassadors, promoting your brand across their personal and digital spheres. This creates a self-sustaining engine with inherently high lifetime value.
But of course, if it were that simple, every brand would be doing it!
Communities grow around shared interests, beliefs, behaviours, occupations, situations, and locations, underpinned by trust and transparency. So in order to grow an authentic community, you need to have a deep understanding of your audience and the niches within your vertical.
Your job is to give them a reason(s) to come back to you. There is no definitive formula to do this, but it can come from a blend of elements:
- Crafting a value proposition that connects deeply with your audience
- Consistently delivering captivating content to your target demographic
- Fostering a sense of community that resonates with your audience’s identity
By doing this you can build trust and create a sense of belonging, which will make community members more likely to remain loyal to the brand, even when faced with competitive offers. When members of the community have positive experiences, they’re more inclined to recommend you to others, amplifying your reach and influence.
By providing valuable and relevant content, you engage customers in conversations. And by soliciting (and listening to) feedback, you can strengthen the relationship with them.
How you do this depends on your audience demographics and their preferred digital ‘watering holes’, but social media, email marketing and interactive content can have their place in community growth. In a previous blog we’ve detailed the role of email in nurturing customer loyalty, and given an example of how a Facebook group can be used as a low-cost way to engender community engagement.
Outshine the competition
Businesses that truly understand what their customers want and consistently deliver on their promises hold the keys to lasting success. In a world where choices are everywhere, the challenge is crafting an irresistible hook – a unique blend of products, services and experiences to keep customers coming back for more. It’s not enough to be good; you have to be exceptional.
In crowded markets, differentiation is paramount. There’s no singular recipe, but weaving an authentic, compelling brand narrative, fostering a culture of innovation, and delivering a service that leaves customers consistently impressed are powerful ingredients. When you crack that code, you go from being just another option to becoming the only choice.
Boosting customer lifetime value is an important lever for sustainable eCommerce growth. It necessitates continuously innovating the customer experience while preserving your core identity. If you can master this intricate balance, the rewards are immense – growth fuelled by committed ambassadors whose love of your brand perpetuates itself. In many ways, lifetime value is both the hallmark and catalyst of eCommerce success.
This article is part of our ongoing ‘long-term thinking for sustainable growth’ series covering traffic, conversion rates, and AOV. If you’d like to learn more about how we can help increase your ROI in 2024, contact our knowledgeable team today. We’d be delighted to help.
