Facebook, Twitter, YouTube, Netflix, Instagram – companies that changed the habits of millions of people. How did they do it?
Last week Nir Eyal, author of Hooked: How to Build Habit Forming Products, joined us on a webinar to talk about his research and help us understand how these companies developed products that so effectively changed user behavior.
Nir started by outlining just how customer habits improve business performance:
You may still be polishing off the last of the champagne and eggnog, but we’re already one week into the new year. It’s time to wake up from the food coma and get serious about growing your business in 2014.
Problem is, there are a million things you can do to grow your online business. You can write more content, better content, improve SEO, hire more employees, start an Instagram promotion, boost social sharing, do a publicity stunt, use PPC advertising, guest blogging, or get better at email marketing. There are so many things you can do, but what should you do? Where should you focus your energies in 2014 for maximum impact on the bottom line?
Your competitors are spending their time learning everything they can about their best customers. Why is figuring out this small group of customers just as important as attracting new customers? Read on to learn why your best customers are so valuable to your business:
A holiday shopper is not your average customer. The rest of the year, you might be selling high-end kitchen supplies to self-taught chefs. Come November, your new customer could be a take-out addict – hard pressed to describe the difference between a braise and brine. Making the assumption that a holiday shopper will become a year-round customer sets ecommerce retailers up to overspend, underspend, or spend in the wrong places to acquire these shoppers. Before jumping in to capturing new holiday shoppers, make sure you first understand just what a holiday shopper is worth.
If you follow this blog on a regular basis, you know that we’re big believers in measuring customer lifetime value. Knowing your CLV is the key to effective marketing. If you know your customer lifetime value and your cost to acquire a customer, you know whether you have a profitable, scalable business or not. Segment these same numbers by customer acquisition source, channel, and ad placement, and you have a recipe for optimizing your marketing.
We’ve found that calculating customer lifetime value is one of the single biggest challenges digital marketers face. Companies tell us that they spend countless hours with SQL queries and spreadsheets or pay thousands of dollars to consultants.
You have three groups of customers that require special attention. By creating contact lists for these groups you can send them tailored communications, such as rewards, promotions, and product updates. Then, just watch as the repeat purchases roll in.
Many marketers focus all of their energy on bringing new customers in the door. What if some of that energy were spent in improving customer lifetime value instead? Increasing CLV is one of the most effective ways to juice your entire customer acquisition funnel.
If you don’t know where to start, try these five steps and measure the impact they have on your customer lifetime value.
Have LTV data by source handy when you are making marketing spend decisions or optimizing campaigns.
Have an LTV marketing optimization strategy that includes:
A plan for how much you can scale each channel without diminishing returns. For example some Internet retailers find a few keywords to be phenomenally profitable, but they can only scale those terms to the available ad inventory. Often, while a portion of a search or display media campaign under-performs the rest of the campaign in terms of LTV, the company still needs the volume from the other keywords in order to hit revenue targets.
The frequency that LTV is calculated and is available for optimization. Some companies get daily LTV updates and can track variations in small time periods. Others only batch LTV calculations quarterly and new merchandising mixes or first time media buys will not yield data until the close of the quarter. The most sophisticated online marketers know the frequency with which their customers make repeat purchases, site visits, or other metrics that they track and optimize.
Your most important metrics and how they relate to each other. For example, many online marketers have their own methodologies for optimizing campaigns. Some reallocate spend every week, month or quarter based on their best/worst performers. Others know that on average their customers make their second purchase 30 days after the first and use this information to assess the success of acquisition channels before scaling spend further.
Shorter cycle-time CLV optimization. If you know that re-purchasing patterns or churn rates are fairly consistent after 90 days, then use 90 day CLV as your optimization metric and track correlations between initial purchase CLV, first 30 day purchase CLV and 90 day CLV. If your CLV data updates weekly, you can then optimize in 5 weeks and again in 13 weeks after you know how these customers compare to your average customers in terms of repeat purchases. Online marketers are limited in their performance by access to data. The more a marketer can use data to optimize their decisions, the more they will produce results that hit the goals of the company as a whole.
In any online marketing role, you have performance targets in terms of both volume and CPA. However, for Internet retail, subscription and other businesses where revenue grows after the initial acquisition and can vary dramatically over time, many online marketers struggle with how to measure customer lifetime value by acquisition source, and how to use that information when making spend and customer acquisition decisions.
At RJMetrics, we work with some really advanced online marketers, and I had the opportunity to ask them how they addressed this issue and what their optimal solution would be.
Accurate Customer Profitability Data by Source
An all-too-common frustration of online marketers is not having visibility into data they need to allocate their acquisition budget. In order to optimize for the highest ROI in terms of customer lifetime value, online marketers need to access that data in both the right format and level of detail. In high performance companies, online marketers are the “client” in instances where another team maintains customer profitability data warehouses.
Validate Hypotheses on Acquisition Channel Performance
Many online marketers have hunches on the lifetime value of customers produced through coupon sites, affiliates, paid search, unpaid search and social media. For example, some ecommerce companies suspect that certain acquisition channels produce much lower customer lifetime values than others, but they do not have data to validate their assumptions. So, they keep funding what they suspect are less profitable channels.
Actionable Customer Lifetime Value Data
Customer lifetime value data is only as effective as the marketer’s ability to use the data in their day to day marketing activities. Some bid management tools and email service provider interfaces let online marketers override CPA targets with customer lifetime value metrics to optimize for profitability. Having this data handy when optimizing search, affiliate, digital display, re-marketing and other spend is the best way to ensure the highest CLV and not just the highest first purchase ROI. The two figures may differ dramatically and CLV is more important to the profitable growth and sustainability of a company.
Customer lifetime value is an important metric for every business, but it is especially critical for e-commerce, daily deal and flash sale sites. For companies like these, a key to success is profitably acquiring new customers. Without a firm grasp on customer lifetime value, companies run the risk of acquiring unprofitable customers or getting outspent and outgrown by a competitor who better understands the metrics of their model.
In this post, we’ll use the customer acquisition strategies of Groupon and LivingSocial to frame a discussion about the importance of optimizing customer lifetime value, customer acquisition cost and other analyses for daily deal sites.
Groupon versus LivingSocial Customer Acquisition Debate
Groupon and LivingSocial have different views on “loss leader” customer acquisition deals, which may be due to different views about repeat purchase rates and lifetime value. As a publicly traded company, Groupon releases statistics on its customer acquisition costs to the public. LivingSocial, a private company, does not disclose such data. However, we can find proxies for acquisition cost by examining some of their deals (more on that later).
Acquisition costs in the daily deal space have increased dramatically from when these two companies pioneered the market. In fact, Groupon’s customer acquisition costs grew 485% between the first quarter of 2010 and the first quarter of 2011 to more than $30 per email address. However, once customers are acquired, they are believed to be create a profitable annuity of repeat purchases, although how profitable and the duration of that annuity is still unknown.
Groupon CEO Andrew Mason explained the company’s acquisition cost philosophy in an email memo to employees: “Once we have a customer’s email, we can continually market to them at no additional cost…. There is no cost of reacquisition — that’s unusual. If Johnson wanted to follow the Groupon strategy, he would have to start a free daily newspaper about bandages and then run Band Aid ads in it every day”
Do Deals with High Profile National Merchants have a Lower Lifetime Value?
If customers are as valuable as Mason says, and the incremental cost per sale once Groupon acquires a customer is trivial, why not acquire customer in large volumes at a loss like competitor LivingSocial has done with their Amazon and Whole Foods deals?
LivingSocial presumably offers deals such as promotions where customers spend $10 to get $20 in merchandise from Amazon or WholeFoods in order to acquire new subscribers. Users acquired through these deals may represent up to a 66% discount off of Groupon’s current acquisition cost.
Groupon’s CEO Andrew Mason also addressed this topic in his email to employees by stating, “…Our marketing team has tested this tactic enough to know that it’s generally a bad idea, and not a profitable form of customer acquisition.”
Depending on the proportion of the coupons that were bought by new users and the percentage of coupons that were redeemed, LivingSocial might be acquiring users for less than Groupon’s cost per acquisition. The other critical element is the value of the customers acquired through this channel. Groupon’s cohort analysis on these users may have shown that customers from those deals are unlikely to be repeat customers.
Whether or not that is the case, identifying repeat high value customer segments by acquisition source versus those likely to churn is invaluable information in the daily deal market. LivingSocial and Groupon surely have different rates of repeat purchase; the question is how much and is there a distinct difference in rates by deal type.
Learn which Deals and Sources generate Your Most Profitable Customers
In spite of the fact that customer lifetime value is so critical to success, young e-commerce, flash sale, and daily deal companies face several challenges that make it difficult to pull these numbers. First, with a limited operating history, it can be difficult to draw high-confidence conclusions about the length of your customer lifecycle or how the average customer will ultimately behave. For example, Groupon attributed a lower than expected profit to refunds associated with a specific cohort that had higher than average customer dissatisfaction rates associated with them.
Another challenge is that e-commerce sites are often started by excellent merchandisers who don’t have a core competency around technology and quantitative marketing. This can make it difficult to find the internal resources to run complex calculations and ensure that the data is clean and consistent for long term analysis.
One tactic that we recommend to all of our e-commerce clients is splitting the customer lifetime value calculation into several separate metrics that address different stages of the customer lifecycle. This makes individual parts of the product or acquisition strategy easier to optimize, and it ensures the calculations can be understood and communicated with the entire team.
A few examples of these customer lifecycle metrics are:
Percentage of members converted into buyers
Time from account creation until first purchase, first purchase to second, second to third, etc.
Revenue and gross margin generated in first 30, 60, 90, 365 days
Invitations and social referrals in first 30, 60, 90, 365 days
Groupon is not required to disclose this level of detail on their unit economics, but you can be sure that they and LivingSocial are monitoring these statistics carefully on their different customer and deal types to decide which are most profitable.
Get Industry Statistics on Daily Deal Customer Lifetime Value and Repeat Purchases
We will be publishing our first daily deal, flash sale and general e-commerce industry benchmarks of metrics like customer lifetime value, time between purchases and more in June, so please check back and get your copy.
We have a great view into the evolution of best practice metrics for e-commerce, and we would love for you to try RJMetrics and leverage our experience for your business.