How to Increase Customer Lifetime Value (CLV): Pay More Now, Get More Later

How to Increase Customer Lifetime Value (CLV): Pay More Now, Get More Later
This is a special guest post from Johnathan Dane, Founder of KlientBoost

If you’ve been in ecommerce long enough, you already know the pain. A flood of new users arrives on the heels of a campaign. You turn up the ad spend and either your ROAS (return on ad spend) stagnates … or it flatlines.

What could be the cause? Why is scaling advertising so difficult? What’s going wrong?

It could be that nearly all of your new customers are not only first-time buyers but one-time buyers.

To increase customer lifetime value, transforming one-time buyers into repeat and loyal customers is crucial. You may feel you’re paying more at the beginning. But don’t worry, you’ll be making more later because of it.

Here’s how we’ll get there …

  1. Calculate Customer Acquisition Costs
  2. Calculate Customer Lifetime Value
  3. Segment Your Customer Lifetime Value
  4. Recalculate Extended Customer Lifetime Value
  5. Lower Your eCAC For One-Time Customers
  6. Increase Your ROAS For Repeat Customers
  7. Retarget One-Time & Repeat Customers
  8. Loyalize One-Timers & Repeaters
  9. Maximize Customers with Loyalty Programs
  10. Look Down the Long Road

1. Calculate Customer Acquisition Cost

For starters, let’s clear up the distinction between customer acquisition cost (CAC) and cost per acquisition (CPA).

The two are often considered to be the same. However, CPA doesn’t deal with actual customers. Instead, it measures the cost of conversion like:

  • Email signup
  • Account registration
  • Free trial signup
  • Lead-form submission

These acquisitions hopefully lead to sales, but they aren’t revenue in your pocket quite yet.

CAC deals with actual customers who are spending money to purchase your products or service. This is why CAC is a better metric to track for ecommerce brands that are selling online.

Calculating your ecommerce CAC is fairly straightforward, which is why it’s so often used as an easy indicator of wins/losses for your different goals. Take your total acquisition spend, divided it by how many new customers you acquired, and you get your average CAC:

Calculating customer acquisition cost CAC

Image via Smile.io

However, just because CAC gives you an easily interpreted picture of how your campaigns are doing doesn’t mean it should be the golden metric by which you measure success.

If you’re looking to only acquire new customers in 2018, then CAC is a fine metric to optimize around and you can stop reading here.

If you want to truly grow your ecommerce revenue, you’ll need increase customer lifetime value.

The more you grow your customer lifetime value (CLV or LTV) and increase the number of repeat and loyal customers, the more revenue you’ll generate from each user, which will make acquiring new ones even more exciting.

2. Calculate Customer Lifetime Value (CLV)

Lifetime value takes repeat purchases into account to calculate the value of any given customer acquisition. LTV of a one-time buyer would obviously be much lower than that of a customer who buys repeatedly from your site.

How To Increase Customer Lifetime Value (Clv): Pay More Now Get More Later

Image via PostFunnel

This snippet from a Kissmetrics infographic is also a good template for calculating average LTV.

Calculating customer lifetime value

Calculating the customer lifetime value of your different users can get tricky. To simplify this process, using the Glew.io Shopify integration, you can segment your customer lifetime values by acquisition channel:

LTV-based customer profitability

Calculating LTV requires averaging many different levels of customers. You have low and high spenders and few-time versus frequent buyers.

If you can improve this metric, as opposed to just CAC, you can generate far more revenue from each acquisition. Meaning more money, from the same amount of ad spend. This is how you start growing that ROAS you’re still hunting for.

3. Segment Your Customer Lifetime Values

Now that you know what LTV is, here’s the twist: there’s no actual LTV — only LTVs … emphasis on the plural. Knowing the longterm effects of your customer acquisition model will help determine which “types” of customers your campaigns are generating.

How To Increase Customer Lifetime Value (Clv): Pay More Now Get More Later

You may be spending the majority of your budget on one-time buyers, which is only going to drag you down eventually. Or, you may be targeting the right types of users, but not following up with the right loyalty programs to get them coming back to your site.

Regardless, segmenting your customers by LTVs will give you a better picture of where your most profitable customers are.

Customer lifetime value over customer types

Image via Sleeknote

(1) One-Time Customers

As the above chart shows, there’s hopefully a bit of a bell curve with the LTVs of your clientele. Your one-time customers would be classified as "non-profitable," as they’re costing you the most to acquire while making you the least money.

First-time buyers vs repeat customers

Image via Conversio

One way you can improve your ecommerce performance is to raise your revenue from these one-offs. Increasing the average first-time sale will help justify spending more to acquire new customers.

Plus, improving the average value of your first-time sales will help grow your bottom line altogether.

(2) Repeat Customers

Repeat customers will hopefully take up the bulk of your customer base. These customers may be part of your remarketing campaigns or may simply be returning of their own volition.

Keep in mind that a “repeat customer” can range from anything beyond two purchases. A bulk of these repeats may be barely getting past the one-time purchase minimum.

You can try to raise the average order value for these customers. But you may run into some trouble here if there isn’t a clear, trackable pattern behind their buying behaviors.

Instead, focus on increasing the frequency of their orders.

How much are returning shoppers really worth?

Image via Yotpo

Generating more purchases from these repeat customers will help bolster your revenue in the middle of your bell curve.

And, if you can take the average number of purchases from 3 to, let’s say 5, you’ll have nearly double your sales just be making sure your repeating customers keep on repeating.

(3) Loyal Customers

Loyal customers are obviously where you’re going to make the most money. These are customers who are loyal to your brand — users who are come to your site to buy first.

They may even be part of an ecommerce loyalty program to encourage more purchases. We’ll talk more about this later.

Creating more loyal customers comes from what some call "customer optimization." This is where you continue the marketing process after acquisition to better connect user to brand. This can come in many shapes and forms:

  • Customer feedback surveys
  • Customer wish lists
  • Repeat customer discounts
  • Loyalty programs
  • Limited-time offers

You want as many loyal customers as you can have (just think of it as ten purchases per customer versus one purchase per customer). This is why creating effective loyalty programs is so important for growing your ROAS in ecommerce.

The more loyal customers you have, the more revenue you can expect without having to use more ad spend.

4. Recalculate Extended Customer Lifetime Value

Thus far, we’ve discussed the value of different users as they purchase discrete items on your ecommerce site.

If you know how to properly segment your ecommerce campaigns, you’ll have them divided at least by product lines. And certain product lines may contain products that naturally upsell to one another.

Why not segment your CACs accordingly?

If you have a product that’s great at generating one-time purchases and ties into a pricier product well, you may want to consider them as part of a singular campaign. This is where extended customer acquisition cost (eCAC) comes in.

Let’s look at an example:

  1. Xbox controller repair kit: $10.00
  2. Xbox controller: $35.00
  3. Xbox controller pair: $70.00
  4. New Xbox One console: $230.00

Now, if you were to reorient your campaigns to focus on upselling from product 1 towards product 4, you could see a potentially different picture of your CAC. Let’s look at the basic calculation for CAC again:

Calculating customer acquisition cost CAC

Image via Smile.io

Assuming you spend $X on a new customer, if you use the value of the first purchase only, you get a CAC of $X. But, if you consider the value that user provides if he or she purchases all four products, your CAC drops to $Y.

Now, you may be asking: why not just use LTV? Well, because eCAC should apply to discrete, cohesive product campaigns that align to specific acquisition channels.

How To Increase Customer Lifetime Value (Clv): Pay More Now Get More Later

Image via Slideshare

Prioritizing eCAC should make you more willing to spend a bit more at the beginning to first acquire your user. Of course, this early spend is based on eventually upselling them towards a more profitable product.

(1) One-Time Customer eCAC

Calculating your eCAC for a one-time customer will look essentially the same as a regular CAC (as there is still only one transaction taking place). If you’re committing your metrics to a longer endgame, these one-time purchases may look like bigger losses than normal.

If you’ve calculated that, hypothetically, 20% of your targeted users in this campaign complete the upsell process, you may have upped your ad spend accordingly. This means that these one-time purchases are costing you valuable ad spend without generating nearly enough revenue.

Customer lifecycle

Image via Rejoiner

This is why increasing and optimizing your repeat and loyal customers is so important when looking down the long road of ecommerce.

(2) Repeat Customer eCAC

On the other hand, repeat customers who perhaps continually buy the same product are generating more revenue, but aren’t increasing their average purchase value.

For example, let’s consider you establish the reasonable timeline for your complete upsell process is approximately one year. Ideally, your user will have bought all four products within your upsell eCAC campaign.

Conversely, a repeat customer who is continually buying a singular product within the campaign at the same frequency may not make you as much money:

  • Total revenue from four repair kits: $40
  • Total revenue from four controllers: $140
  • Total revenue from four controller packs: $280
  • Total revenue from all four products: $345

There’s also the very likely possibility that repeat customers buy different products within your campaign without completing your complete process:

  • Repair kit + Controller: $45
  • Repair kit + Controller pack: $80
  • Controller + Xbox console: $265

The goal is for them to complete the entire upsell. Which means you need to optimize your sales and checkout processes to create loyal customers. These loyal customers will be spending enough (and then some) to lower your eCAC and drastically increase your ROAS.

(3) Loyal Customer eCAC

These customers will have your lowest eCAC of all your different segments. Why? Because they’re providing the most revenue over the elongated sales and upsell process.

10 ways to increase LTV by boosting retention
Image via LloydMelnick

Creating more loyal customers is why loyalty programs and remarketing are such vital practices to optimize your ecommerce performance. Ideally, these users will have completed your complete upsell process.

Not only that, if you’ve implemented a loyalty program (which I’ll teach you how to do below), they’ll also be encouraged to buy other products to increase their LTV beyond your eCAC campaigns.

More often than not, improving the eCAC of any user will also improve their LTV — both of which are great for ROAS.

5. Lower Your eCAC for One-Time Customers

Now that you know the different segmentations of LTV and eCAC, you can start to optimize your campaign to raise the bar for each segment.

Lowering your eCAC for one-time customers is going to look pretty much the same as lowering your CPA in any regards. It’s going to require you diving into your AdWords account and performing some bottom-up CRO.

How To Increase Customer Lifetime Value (Clv): Pay More Now Get More Later

Image via Myzone

Bottom-up CRO will include optimizing your sales process before you optimize your landing pages for conversions and your AdWords account for clicks.

This is somewhat backward in the eyes of the average digital marketer. Then again, you aren’t looking for "average" results, are you? Consider this:

  • You optimize your ads for a better CTR
  • You generate more traffic to your product pages
  • You pay for the increase in traffic without more conversions
  • Then, you perform CRO on product pages for better CR%

You can see here that there’s a window in which you’re simply burning money by paying for more traffic. Instead, if you optimize backward, your CRO goals will look more like this:

  • Optimize your checkouts and product pages for better CR%
  • With higher CR%, you optimize your ads for more paid traffic
  • Generate more optimized sales from more optimized traffic
  • With your increased revenue you increase your ad spend
  • Positive effects compound and you break into your happy dance

Lowering your eCAC for one-time buyers will come from improving your conversion rates primarily, and adjusting bids second. Make sure you don’t mix the two.

6. Increase Your ROAS for Repeat Customers

If you’re truly optimizing toward a higher ROAS (via higher LTV and lower eCAC), you won’t want to blindly chase more purchases via any channel. You want the right first purchase from the right channel.

How To Increase Customer Lifetime Value (Clv): Pay More Now Get More Later

Image via Newfocus

Ideally, you can control the customer journey in such a way that you guide the user through the relevant and profitable products you want them to buy.

Encouraging repeat customers to finish checkouts and buy related items through suggestions engines are both ways of doing this.

Identifying and prioritizing the right products purchased through the right channels should give you more granular control over your ecommerce campaigns and improve your overall ROAS. As a wise marketer once said:

You want to fire your least profitable customers. Focus on the customers (and the products) that are making you money.

Ideally, you can focus the customer journey to purchase (and repurchase from upselling) the products that generate the highest return for you.

7. Retarget One-Time & Repeat Customers

We’ve discussed the importance of increasing your ROAS with more loyal, long-term customers. But it’s another thing entirely to take one-time customers and turn them into repeat (and then, loyal) customers.

How To Increase Customer Lifetime Value (Clv): Pay More Now Get More Later

Truth is, remarketing campaigns aren’t reserved solely for targeting users who have abandoned their carts. Using cookies, you can target users who have hit specific thank you pages to remarket towards one-time purchases and turn them into repeaters.

If you’re creating remarketing campaigns based on specific cookies, you can take it one step further.

Instead of tagging behaviors like an abandoned cart, you can place cookies on thank you pages after completed first-time transactions. Then, you can retarget these users with more related products to bring them back to your site.

How To Increase Customer Lifetime Value (Clv): Pay More Now Get More Later

Image via MOZ

When you consider the enhanced metrics that Facebook remarketing boasts, as opposed to classic PPC averages, targeting these users again via remarketing makes a lot of financial sense.

You don’t have to stop at one-time customers either. You can target users who frequent a certain product page (possibly one within your upselling campaign) and remarket to them as well in order to boost your conversions and ROAS.

8. Loyalize One-Timers & Repeaters

Remarketing campaigns aren’t the only way you can (or should) approach these one-time and repeat customers. Especially if you’re trying to create more loyal customers who are constantly tuned into your content and products, nurturing campaigns are ideal.

How To Increase Customer Lifetime Value (Clv): Pay More Now Get More Later

Image via Business2Community

Encouraging users to sign up for a membership, loyalty program, or subscription after their first purchase may be too intense. But, asking for their email address so you can keep them updated on your latest deals doesn’t sound as threatening.

Remember, regardless what time of campaign you run, it’s always vital to match your offer to your lead temperature.

How To Increase Customer Lifetime Value (Clv): Pay More Now Get More Later

Adding one-time users — or repeat users purchasing within your upsell campaign for the first time — is a great opportunity for you to upsell new products and encourage return visits. There are quite a few things a drip email campaign can achieve:

  • Emphasize return visits for new products
  • Advertise new deals (for free)
  • Offer special discounts for repeat customers
  • Advertising benefits of loyalty programs
  • Offer limited time deals/sales/coupons
  • Develop brand awareness and community

Drip campaigns are also a great channel through which you can track users who have entered your upsell process. If someone has bought a razor (the first product in your upsell system), you could send them an email like the one below:

How To Increase Customer Lifetime Value (Clv): Pay More Now Get More Later

Image via eConsultancy

Regardless of the method you use for your nurturing campaign, just ensure that it’s exactly that — nurturing.

These email campaigns are meant to generate returning visitors and customers to your ecommerce site. So, keep your campaigns focused and streamlined towards singular goals (i.e. finish checkout, upsell, loyalty program).

9. Maximize Loyal Customers with Loyalty Programs

Ecommerce loyalty programs are one of the best ways to improve the eCAC, LTV, and ROAS of your ecommerce campaigns.

How To Increase Customer Lifetime Value (Clv): Pay More Now Get More Later

Image via Shopify

The classic "points-for-dollars" approach is a great way to gamify your ecommerce transactions in a way that users enjoy and value. They can not only see their points accumulating in an exciting manner, they also can see legitimate value growing the more they shop on your site.

Value here would be considered future discounts and deals that they would be offered once hitting certain point levels.

There are a few best practices when it comes to setting up loyalty programs. These will help you ensure that your clientele easily understands the program’s value (which will help sign-ups) as well as continue to enjoy the benefits (which will help retention):

Make the first level of the loyalty program easy to satisfy.

This will help break the initial entry barrier and get users looking into what else your higher level programs offer.

Use bonus point events and double point items.

Varying the actual “point” value of your products will keep users on their toes. You can also leverage these point values to increase the incentive to buy during seasonal spikes. Or, you can encourage users who already have shown interest in items to complete transactions for double points.

Continue upping the ante.

Your loyalty program should offer more and more perks the further up you go. But, it should also be harder to achieve a level-up with each rank. Ideally, each level-up will give just enough of a taste of the next level to come that your users will continue to buy in order to get more perks.

Lastly, keep the loyalty program easy to understand.

On average, half of users drop out of loyalty programs because they were shown irrelevant or confusing deals that were too hard to earn. And, vice versa, moran half who stay site their reason for staying is the ease of earning points and relevancy of products.

How To Increase Customer Lifetime Value (Clv): Pay More Now Get More Later

Image via Visiture

By using loyalty programs in tandem with drip campaigns, you can hopefully take the bulk of your one-time and repeat shoppers and turn them into a loyal customer base.

These constantly returning shoppers will be a constant stream of revenue that you don’t have to worry about wasting your PPC budget on. And we all know, more revenue without more cost is always great for your ROAS.

10. Look Down the Long Road

It can take time to see the true results of any digital marketing strategy. But here, we’re intentionally playing the long game.

You may have to sit on your hands longer than you’d like just to see the data behind what types of products and customers you need to be focusing on. But it just might prove to be the largest asset in your ecommerce strategy.

Take your time developing a well guided and well-nurtured brand experience that creates customer loyalty. This is how you can improve the actual ROAS of your campaigns instead of just the vanity metrics; by increasing the value of each customer in your funnel.

When it comes to creating the loyal customers of a greater lifetime value, slow and steady wins the race.


About the Author

How To Increase Customer Lifetime Value (Clv): Pay More Now Get More Later

 

Johnathan Dane is the Founder of KlientBoost, a PPC agency focusing on CRO and aggressive testing. If you like what you just read, you should see what their custom growth proposal looks like.