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As hardworking e-commerce marketers, you might measure success using ROI, Customer Acquisition Rate, Net Profit, and so on. 

However, while these tactics are essential to the growth of any successful company, they don’t tackle the ultimate objective: managing campaigns to maximise customer lifetime value (LTV).

Within most marketing channels, ALL customers and orders are created equal, which means you’re paying the same amount to acquire customers, regardless of quality.

The best way to approach this problem is to ask a simple question: “which customers do I want to come back, and which ones are destroying my margins?” In other words, what’s a given customer’s true lifetime value, and how is s/he driving the success or failure of my company?

It’s more than likely that the 80/20 rule applies to most companies, where 20% of your customers account for the largest portion of your ongoing business.

Does your company currently measure the LTV of your customer base? Do you know which of your customers are the most valuable?  Do you have a customised response for each caller that contacts your call centre?

If you answered “no” to any of these, stop reading, and finish the article after you’ve captured this first opportunity.

Most e-commerce companies know that LTV is a great way to measure a customer’s net worth to a business. But how many of us actually use it to optimise our marketing campaigns?

With the spotlight on growth and profit, most marketing managers get stuck continuously answering the question “what was your return on ad spend for that campaign?”

Instead, execs should ask “how many high-LTV customers did you capture?” If they don’t, the company risks focusing only on immediate ROI, and acquiring customers that absorb expensive services long into the future.

Just consider: what would you be able to accomplish if you spent your marketing budget only on customers that added long-term-value to your company?

Less than a decade ago, web portals (Yahoo.com, MSN.com, and AOL.com) were all the rage and captured a significant portion of retail online spend.

When I studied the LTV of consumers from each of these portals, one thing was strikingly clear. One portal stood head and shoulders above the rest. Which one?…….Drumroll…. AOL! (Wow, really? Dial-up? Are you kidding me?).

We discovered that not only were those consumers “creatures of habit” with their ISP, but once you captured a loyal AOL consumer, they would come back to shop again and again and again. Some of these consumers are STILL on AOL dial-up!

To begin using LTV in your marketing approach, ask yourself a few questions:

  1. Have you established metrics to separate your good customers from the bad (profitability, revenue, repeat purchases, etc.)? Separate them in groups and deliver targeted campaigns.
  2. When was the last time you reviewed each marketing channel to see which one delivered the most high-LTV customers? For example, how do search customers compare with those from affiliates?
  3. How do you treat these customers differently when they interact with your company across all channels (website, customer service, deals/discounts)?

Optimising LTV is not a perfect science, but what matters is that you start somewhere and refine your process.

DSPs now offer display inventory through an impression-by-impression auction-based system. This is just one example where it’s imperative to value customers distinctly in real time. Once you’ve found the ideal customer, create look-alike modelling strategies to find their friends!

In the meantime, bring your marketing team together and develop a plan to optimise your marketing campaigns, so that you can capture those customers who will pay your bills for years to come.

Jake Bailey

Published 21 July, 2011 by Jake Bailey

Jake Bailey is Chief Evangelist at RichRelevance and a contributor to Econsultancy.

5 more posts from this author

Comments (2)

James Gurd

James Gurd, Owner at Digital JugglerSmall Business Multi-user

Hi Jake,

Thanks for the thoughts.

I agree that LTV is important and being able to identify most profitable customers can help when evaluating marketing investment.

However, I prefer to evaluate campaigns based on net worth, not volume of high LTV customers. If you focus efforts on campaigns that yield the greatest number of high LTV customers, you might not actually get the greatest returns. Why? Because it's often the 80% of lower LTV customers that make up the bulk of your campaign revenue. Ignore them and whilst your average net value per customer will increase, your overall net value will decrease.

So for me it's the end result that is important. I've learned to accept that you can't have it all but net profitability for marketing investment is the primary financial goal.

thanks
james

about 5 years ago

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Paul Talbot

Hi Jake,

Here’s another piece of this LTV puzzle.

The Nielsen Company has researched the world of digital circulars.

It notes that “the online circular is the most widely used part of a grocery/drug retailer’s web site, but the lift gained is a bit less than the lift seen for the site overall.”

Baffling. Circular content is typically more commerce-driven.

And here’s something else from the Nielsen research that has me scratching my head.

“Success is driven by new shoppers, not greater spending among existing shoppers.”

That’s for the circular. And where price is the primary lure to pull in a prospect.

The specific elements of success, getting into your LTV metrics, are not revealed here. So we don’t know how the new shoppers will perform for the long haul.

But isn’t it fascinating that they outperform an existing customer?

Fascinating because the retailer’s existing shoppers aren’t demonstrating levels of loyalty to the circular, that purchasing from the circular has not been ingrained as habit. At least not a strong habit.

Obviously, the answers lie in the methodology, the metrics, and how Nielsen defines success.

But as a copywriter, I find this research notable. It challenges one of my longstanding beliefs… that the cultivation of existing customers is a far more profitable marketing undertaking than chasing down new ones.

about 5 years ago

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