In my previous article I talked about why many stores struggle to grow past a certain point.
That’s because many stores have a below average customer retention rate which means they struggle to get people back to make a second and third purchase.
You see, there are only really two ways for you to grow your online store.
One, find new customers.
And two, get them to spend more with you over time.
If you’re struggling to bring customers back it you will struggle to achieve the latter, and it means that you always have to chase new customers in order for your business to grow.
This means spending more time, effort, and money on marketing which is not an ideal solution considering that the cost of advertising keeps rising year-on-year.
Any billionaire or investor will tell you that a business with a high repeat customer rate is automatically more valuable than one with a below average repeat customer rate.
Because having a decent repeat customer rate creates a revenue baseline for your business.
For example, if your store generated 1,000 customers a month at an average order value of R1,000 you are generating R1m a month in revenue.
A 20% repeat customer rate, on 1,000 customers = 200 repeat orders.
200 orders x R1,000 average order value = R200,000 repeat business!
That means you are making R200,000 next month with very little effort.
Now, it’s not necessarily that easy, but it is that simple!
The most profitable eCommerce stores in the world have a healthy balance between new and repeat customers.
A healthy percentage to aim for when it comes to repeat purchases would be around 20-30%!
Before we talk about the different ways to bring customers back, we first need to talk about the number 1 metric you need to measure when it comes to the growth of your eCommerce business.
And that is the lifetime value of a customer.
What is customer lifetime value (LTV)?
In short, it’s basically the total amount of money you make back from a customer over time.
For example, if someone buys a pair of jeans from you in month one worth R1,000.
And, then in month two, buy a shirt from you worth R500.
That means that their lifetime value over two months is R1,500 (R1,000 + R500)
The reason this metric is so important is because it gives you an indication of what a customer is truly worth to your business.
The higher the number the better, obviously.
In my previous article I explained in short why it’s cheaper to get a customer to make a second purchase, than to find a brand-new customer.
I also mentioned that you make more profit from a customer on the second and third sale than compared to the first sale due to the high initial acquisition cost.
If you haven’t had a chance to read it yet, do so by clicking on the image below.
Why is customer LTV so important?
The goal of a business is to make as much profit as possible from a single customer, right?
So, the higher your LTV, the more valuable the customer to your business, and this means the more profit you are making back from a single customer.
Ultimately, you want customer to come back as frequently as possible, and you want them to spend as much as possible
Calculating and measuring your LTV monthly is crucial to the profitability of your business!
If your LTV is increasing monthly, then it means you are doing a decent job at bringing customers back, which can assist improving your store’s overall profitability.
If your LTV is dropping over time, it means you are making less profit back from a customer, and therefore overall profitability might be on the decline as well.
However, one of the main reasons tracking your customer LTV is so important is because it gives you an idea of what you can afford to spend to acquire a customer without running a loss when it comes to your marketing.
For example, if your average customer LTV is R1,500 and your average operating margin is 15%, it means that you are making R225 ((R1,500 x 15) / 100)) profit before tax on every customer you acquire.
How to calculate your average customer LTV?
Calculating your average customer LTV is quite simple.
All you do is you take the total amount of orders in your store and divide them by the total amount of customers over a specific time, you then multiply that number by the average order value.
This should give you your average customer LTV.
So, your formula should look like this:
(Total Orders / Total Customers) x Avg. Order Value
Should we do a quick exercise together?
Okay, great here we have a Shopify store’s total orders over the last 90-days.
As we can see, over the last 90-days this store has received a total of 2,108 orders.
In the above picture we can see the store has received 636 customers in the last 90-days.
Their average order value is R1,025.
So, let’s do the math.
= (Total orders (2,108) / total customers (636)) x R1,025
As we can see, their average customer LTV is R3,397.
Below is another example, but this is for a different store.
We can see here that after 2 months the average customer has bought from the store 4 times, and the average LTV per customer is R1,273.
Every customer LTV metric is assigned to a specific timeframe.
In our first example it was done over a 90-day period.
For the second example it was over 2 months.
Ideally you want to track and measure your 90-day and 180-day customer LTV.
That will give you a benchmark to work with.
Next Steps After Calculating Your Average Customer LTV?
Well, now it’s all about finding ways to increase it!
Doing so will greatly benefit your business in terms of profitability.
In the next article we can unpack the different ways you can go about bringing your customers back which will help you increase the overall avg. customer LTV for your business.