Black Friday and Cyber Monday are a bit of a Catch-22 for Shopify store owners — the big sales and deals typically bring in tons of orders and new customers, but how can you ensure you maximize a lifetime of value from those shoppers?
A customer for life
In marketing and commerce, experts often refer to “lifetime value” of a customer, which is commonly shortened to “LTV.”
LTV is typically based on a combination of past and predictive data that calculates how much a new customer is likely, on average, to spend over the course of their lifetime.
There are numerous articles and theories on LTV, but in this post we'll tackle the general concept and more widely accepted theories.
In terms of semantics, “lifetime” can refer to either, quite literally, the lifespan of a person — or simply the time of someone’s life where your products or services are relevant.
Getting a LTV that’s significantly higher than your overhead and business expenses plus your cost of goods sold (COGS) plus the cost of acquisition is a key way to make any business profitable in the long term.
Only one purchase?
It’s also worth noting that some stores, by their very nature, will only have a single sale as part of the LTV total.
For example, if you sell extremely high end “all in one” camping gear, then it’s not likely someone will return to purchase again in the future — nor is there much opportunity to add accessories or enhancements to the product.
Keep in mind there’s nothing wrong with this model — you just need to make sure that your advertising and marketing, COGS and overhead are enough to cover that — and then some.
In addition, assuming customers do fall in love with these types of products, word-of-mouth can be a key way to gain new customers in especially hard to reach niches of people.
LTV and profit
Ultimately, however, building a successful business (online or otherwise) typically requires that you spend less money acquiring a customer and providing the actual product/ service than the revenue you bring in as a result.
That may seem obvious, but it’s not uncommon for beginner entrepreneurs to simply look at markup and overhead and not account for marketing costs.
Other businesses, however, can result in extremely high LTV that’s spread over multiple purchases.
For example, disposable commodities, products that require specific refills, accessories or add-ons attached to them can give you a LTV ranging from hundreds or even thousands of dollars.
The Starbucks effect
A classic example of LTV that is taught in business schools is Starbucks.
While the exact figures cited vary, the general concept here is that once someone decides to buy from this almost ubiquitous brand once, they are likely to come back again and again — even to the point of making multiple purchases in one day (if you’re a Starbucks junkie, you know what I’m talking about).
All of this is done on products (coffee, drinks and simple foods) that have very high profit margin, so not only does Starbucks have flexibility with its cost to acquire (CTA) customers, but its LTV is huge — which ultimately explains why it’s a successful business.
Another key to maximizing LTV is to ensure brand loyalty — something Starbucks has mastered.
For example, while you may sell a product that people need to reorder several times a year, if you don’t have a unique selling proposition or cohesive brand that customers love, they may just buy the item elsewhere.
This can be particularly challenging if you sell products (or close alternatives) that are available on Amazon or even other Shopify stores. In many cases, customers will jump around from store to store based on price, special offers and shipping speed — but if you can create strong loyalty to your brand, that’s less likely to happen.
Calculating your costs, LTV
Ultimately, when you sit down to do the math, you need to make sure that your numbers make sense.
Take this example:
- You’ve been experimenting with Facebook ads and find out your average CTA is $15. Note that this is distinct from the cost per click — since not every click results in a sale.
- You know from your own accounting and sales records that your average order value is $50.
- You know that, after accounting for overhead the wholesale COGS and other expenses, it costs you about $30 to fill a $50 order (some businesses calculate this based on a percentage instead).
So, this means in a typical case, you can spend $15 to acquire a customer that ultimately makes you a profit of $5 ($50 revenue minus $30 in costs minus $15 in advertising fees).
$5 in profit may seem low, but keep in mind that many niches can be extremely challenging to advertise to and if you can continue having this customer place orders, your profit can go up since that $15 CTA is no longer an expense.
A repeat customer
Essentially, if you get another order from the same customer at approximately the same value, your profit increases by $15 to a much more satisfying $20.
It’s also important to note that with a $5 profit margin, this doesn’t leave a lot of room for discounts. Even a 10 or 20 percent discount on the retail price can all but wipe out your profit.
Some store owners actually use the strategy of losing money on the initial order — but obviously this needs to be done cautiously and only if you have the financial stability to go through a period of losses until you can confidently generate repeat orders.
Tinkering with the numbers
In addition, looking at the same scenario above, it’s easy to see how the numbers can fluctuate if a factor changes even by a little bit:
- Let’s say you can get the CTA down even a few dollars by refining your advertising creatives and bidding strategy — say to $12 or $10. That alone can pad your profit.
- Likewise, if your business model requires less overhead and has a higher markup, the math shifts even more in your favor — even with discounting.
- The higher your average order is compared to the CTA will also make initial orders more profitable — and potentially allow for more flexibility in discounts.
Overhead and LTV
Overhead and other related expenses tends to be a fixed cost, but the more orders you process more efficiently, the cost can be spread out among each one and therefore can cost you less per order.
When considering overhead, be sure to consider these types of fees:
- Shopify fees
- App fees
- Payment processing fees
- Staff salary or commissions
- Affiliate commissions
- Your own salary (if you take one)
- Rental of any office or warehouse space
- Cost of packaging
- Cost of shipping
- If you don’t process your own orders, the cost of paying a fulfillment service
- Cost of providing customer support
- Cost of returns and fraud
Soon we’ll take the basics we’ve discussed here about LTV, CTA and COGS and show how you can strategically market (and hopefully profit more from) BFCM customers over the other 363 days of the year.
