Lots of customers = lots of revenue, right? But what if you spend more to acquire a customer than they spend in your store? Calculating lifetime value will not only steer you away from those customers that may actually be costing you money, but will also help you determine which customers have the highest ROI, and what are their common characteristics.
While I can’t tell you the lifetime value of your specific customers, I can tell you what the industry average looks like. In the RJMetrics Ecommerce Buyer Behavior Benchmark we answered this question by analyzing data from hundreds of ecommerce stores. Here’s what we found: on average, the value of an ecommerce customer is $106 in their first 30 days.
Keep in mind though, this number doesn’t increase too much as the year goes on — 69% of a customer’s value is delivered within the first 30 days of doing business with you, meaning the window to maximize repeat purchases is actually very small.
The importance of early engagement
The good news is that if you can get a customer to make a second purchase within 30 days of the first purchase, they are much more likely to come back a third, fourth, or even fifth time.
After the original purchase, the likelihood of a customer making a second purchase is about 30%, but after they make their second purchase, the likelihood of a third purchase jumps past 50%.
This means that targeting your customers immediately after their first purchase might be the most effective way of increasing the value of any given customer.
The value of your best customers
How do you compare the customers who have made one purchase versus those who have purchased 5 or 6 times? Of course customers that purchase multiple times are more valuable, but when you see just how much more valuable, it’s clear where you need to focus your targeting efforts.
The top 10% of customers are worth more than 6x that of the $154 average, while the top 1% are worth almost 18x more.
Ok, now the “average” we looked at in that first chart doesn’t seem quite so valuable. The average is actually hiding these incredibly valuable customers. Let’s go back and reevaluate the value of a customer.
By looking at the median customer lifetime value of a customer we can cut through the noise of the “supercustomers” and see what a “normal” customer actually looks like. Here it is:
So, what was all that $154 talk about earlier? Because the average included our supercustomers, their data heavily influenced our numbers. When we remove these outlier’s ability to skew our numbers, we see a median customer is worth closer to $65 a year.
This data has major implications for how you run your business, particularly when it comes to customer acquisition. There’s a tendency to focus on optimizing conversion rates. This isn’t a bad thing, just as long as you remember that your customers are not created equal. A small group of customers can represent significantly more value than the rest of the pack.
Rather than optimize for more customers, you want to optimize for more customers that behave like those in the top 10%. If you’d like to learn more about how to do that, dive into our whitepaper that we’ve written specifically for you!