You cannot acquire a customer for life. In ecommerce, loyalty is a thing of the past. Many startups and new businesses struggle to find the right balance between customer acquisition & retention. This is especially true for the ecommerce industry. In the quest to growth hack to the next level, ecommerce businesses go all out to acquire new customers sometimes at unsustainable costs.
Over a longer term, online retailers might want to discontinue the channels that have a consistently higher cost of acquisition (CoA). But customer acquisition cost alone is not the right metric to evaluate the performance of an acquisition channel. Ecommerce businesses should instead be including average customer lifecycle value for customers from a particular channel as an important metric for strategic decision-making. This article can help ecommerce businesses garner a better perspective to guide their business decisions.
In simple terms, customer lifecycle value is the projected value a customer generates over the entire lifetime of their interaction with the brand. Focusing on CLV can help a company determine optimize the marketing spends, allowing it to focus on more profitable customers.
CLV as a metric assumes greater significance when put together with CAC. The CLV:CAC ratio is a powerful metric to define the Return on Investment (ROI). Focus on both the levers can help you devise a winning strategy.
Let’s take a look at the comparative illustration of 3 customers from different acquisition channels (A, B & C) assuming 1 year as the time period under consideration:
First step would be to segregate the customer acquisition and purchase data on the basis of marketing channels. Once this is done, there are 2 principal models of calculating the customer lifecycle value:
Under this model, the gross profit from all historic purchases of individual customers is summed up & divided by the total number of customers. This gives the average CLV for each acquisition channel.
This is an advanced method built upon the historic model. Predictive model uses the past customer behavioral pattern to predict the lifetime value of customers. This factors taken into account by this model are as follows:
Assuming next 10 years as the time period (T) for consideration, let us look at the formula that can help you arrive the lifetime value.
Average customer value per month (v) = N*B
Total customer value per year = S = v*12
Total lifetime spend of the customer = L = S*10
Average gross margin per customer lifespan = G = L*m
The final CLV value obtained can be plugged in the ROI ratio (CLV:CoA). Greater the ratio, the better the impact on the company’s growth strategy. The ROI ratio can be used as a good measure to evaluate the performance of the marketing channels and accordingly optimize the budget allocation.
For the CLV model to work, the data set under consideration has to be long enough to provide. CLV is not just for evaluating the marketing channels and campaigns, it can be a great lever to look at the overall business strategy for ecommerce businesses. There is nothing wrong in looking out for new customers. But, it’s important to look at the value brought by ten new customers acquired vis-a-vis ten retained customers. From the cost perspective, it mostly turns out cheaper to retain existing customers. With the wide array of choices thrown open to the consumers with just a click of a mouse, brand loyalty and customer retention becomes more important.
A quick look at Nielsen’s Global Loyalty Sentiment Report provides good insights into the consumer sentiments that result in switching retailer & brand-hopping.
The 5 factors listed above- price, quality, service, selection and features; can together drive the lifetime value of your customers. Doubling the CLV of existing customers is equivalent to doubling the customer base. Here’s some handy tips that can help online retailers increase the CLV:
In the rapid-growth ecommerce boom, it’s easy to get lost in the race for acquiring new customers. Brands go upto the extent of acquiring new customers at 10x the historical averages. They fail to remember that retaining your existing customer can cost lesser and would pay in the longer run to get hold of these low-hanging fruits.
Atul Shah2016-03-24 < Reply
Interesting write up. Very good metrics....What is a realistic cost of customer acquisition for e-commerce and home services startups in India? Via which channels (offline or online) do they see the maximum customer acquisition ?
Abhinav2015-09-17 < Reply
Well-written. Probably an illustrative example of the Predictive Model can make it more helpful.
Dipesh2015-09-16 < Reply
Nice info. Was looking up for quite sometime.
Raju2015-09-15 < Reply
Hi Abhishek, Hope really this article metrics will help everyone to run successful eCommerce business through finding our best lifetime valuable online customers.