Most e-commerce stores focus solely on acquiring new customers. Afterwards, they essentially ignore them and focus again on acquiring their next batch of new customers. But a very valuable metric here is unrecognized: the potential lifetime value of every customer they DO acquire.
Yet for major e-commerce sites, customers seldom make a second purchase. According to Tanner Larsson, CEO of Build Grow Scale, the average repeat customer rate of Shopify-based stores is only 8 percent...which essentially means the 8 percent who do come back had to come back of their own volition, not through any sort of intentional marketing efforts. The Baymard Institute confirms this data, finding that 80 percent of e-commerce stores sell to their customers only once...which means their customers have no lifetime value.
The Importance of Customer Lifetime Value
However, according to Larsson, it's actually impossible to scale a business without a strong lifetime customer value: Without it, the business is 100 percent reliant on a constant supply of new customers to generate revenue. Build Grow Scale has studied how to help e-commerce businesses scale quickly, and Larsson noticed a pattern in e-commerce businesses overlooking the metric of customer lifetime value. E-commerce businesses stay stagnant because they spend all of their time building out the front-end of their business by acquiring more customers rather than taking care of their existing ones.
The potential of paying attention to this metric is overwhelming: The back-end of your business (which appeals to past and current customers and getting them to buy again) can actually produce 3-4x the profit that your front-end produces, according to Larsson. With that much potential, your business simply can't afford to ignore the potential lifetime value of a customer--especially because customer acquisition costs are increasing. Whereas a few years ago, the going metric was that it was 5x more expensive to sell to a new customer than an existing customer, nowadays, with all of the competition and online traffic price hikes, it's more in the ballpark of 8-9x more expensive.
The business that can spend the most to acquire a customer wins...because, as Larsson shares, the bigger the customer lifetime value, the bigger the profit, AND the more a company can spend on acquiring a customer, which then allows it to scale.
For example: Say that right now you're only spending $30 (on a $100 product with $70 COG) to acquire a customer because you're trying to make money (or break-even at best) on the front-end.
However, if you knew your numbers and knew that your average customer longtime value is $300 (instead of $100 = 1 sale), then you would know that you can spend $200-plus to acquire a customer and still profit in the long run. That's almost a 7x bigger customer acquisition budget.
The effects of this strategy shift don't take long to show themselves. Larsson says, "Your profits can double or triple almost overnight if a campaign is made to re-engage customers who already purchased from you. Selling to your existing customers is hugely profitable, because on repeat sales there is zero acquisition cost." And it doesn't take nearly as much effort as you might expect.
The two goals are as follows:
Get the customer to purchase again...and to keep purchasing.
Get the customer to keep purchasing up the pricing ladder, so they spend more with you each time you sell to them
How to Increase Customer Lifetime Value
Keep in mind, your customers are already 15 percent more likely to purchase from you again...even if the original item they ordered hasn't arrived yet! You've already "acquired" them...now is the time to get them to buy more, or buy more frequently. Here are three ways you can raise their lifetime value via email campaign:
1. Cross-promote other product offerings. Depending on which product you have to offer, you likely have something else in your selection that your customer could benefit from purchasing. For example: They already bought the reusable, platinum steel water bottle that you offer, so you already know they like sustainability and carrying around a water bottle. They should certainly now purchase the reusable straw that can come with it. Perhaps they saw it on your site when they purchased the water bottle...then again, maybe they didn't. This is your chance to sell them once again.
2. Ask them to subscribe. Subscriptions are a go-to way to regenerate revenue on a monthly basis. Perhaps you have a product that may need some re-stocking month to month, such as a vitamin supplement for athletes. Rather than relying on the customer to remember to order a new dosage every month, consider offering a subscription plan. They'll sign up to receive a new product on a monthly basis so they don't have to remember to re-order...and from the profit side, a dollar today is worth more than a dollar tomorrow.
3. Send offers. Finally, now that you have their email address, it's also recommended that you send various offers, such as 15 percent off for Labor Day or 25 percent off for your customer's birthday. The best part about offering these discounts? You still end up profiting because the discount you offer them likely isn't equal to what you would've spent on customer acquisition costs marketing to someone else just like them.
Automating for Repeat Purchases
It doesn't just stop at those three ideas. The back-end of your e-commerce store can be continuously built out through automation--which can mean blending these three ideas together or setting up an immediate email response to be sent 12 hours after their purchase with a welcome offer. Each time a new product or a variation of an old product (even a new color) is introduced, that's worth an email. As long as you can extend the lifetime value of the customer you've already acquired, you're operating in the profit margin. Larsson estimates that up to 30 percent of your revenue can be derived exclusively from automated email campaigns in the back-end.
Another benefit: The new money you'll be generating can be invested right back into ad spend. Focusing on the lifetime value of a customer doesn't mean negating the importance of attracting new customers--it just helps us to understand what each customer can bring to the company. Scaling will happen much faster when current customers are supplying the funding for attracting new customers and sticking around for the long term.