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June 29, 2020

Wrangling Up Your Customer Lifetime Value

Wrangling Up Your Customer Lifetime Value

When evaluating the success of your advertising, you typically look at key metrics such as ROAS (return on ad spend) or ROI (return on investment). These metrics are both important when calculating the success of your paid advertising although they do not provide advertisers with the full picture in terms of profitability.

There is another important advertising metric that is often overlooked, yet important to calculate when evaluating the profitability of your advertsiing. It is the CLTV or Customer Lifetime Value.

In this episode, Andy Splichal discusses the formula for increasing CLTV for both professional service and eCommerce businesses through two recent experiences.

ABOUT THE HOST:

Andy Splichal - Make Each Click Count PodcastAndy Splichal is the World's Foremost Expert on Ecommerce Growth Strategies. He is the acclaimed author of the Make Each Click Count Book Series, the Founder & Managing Partner of True Online Presence and the Founder of Make Each Click Count University. Andy was named to The Best of Los Angeles Award's Most Fascinating 100 List in both 2020 and 2021.

New episodes of the Make Each Click Count Podcast, are released each Friday and can be found on Apple Podcast, iHeart Radio, iTunes, Spotify, Stitcher, Amazon Music, Google Podcasts and www.makeeachclickcount.com.

Transcript

Andy Splichal  0:00  

Hello there, this is Andy Splichal. Welcome to the Make Each Click Count podcast. This episode is wrangling up your customers lifetime value, and paid advertising when evaluating the success of your campaign should typically look at key metrics such as your ROAS. Your return on your ad spin or your ROI your return on investments. And these metrics are both important when calculating the success of your paid advertising. Although they do not provide advertisers with the full picture in terms of profitability. There is another important advertising metric that is often overlooked, yet important to calculate when evaluating profitability of your paid advertising. It is the CLTV or the customer lifetime value. The customer lifetime value is calculated when you multiply your average order value by the average times a customer purchases from your website. Example, if your average order value is 100 bucks, and on average customers will make to purchase this over their lifetime from your website then your CLTV is $200, 100 times two very easy, and although it is important to calculate your CLTV when evaluate the profitability of your paid advertising, increasing this metric has very little to do with actual paid advertising. A simple formula that dictates to increase your CLTV you must either increase your average order value, or increase the average number of times a customer will purchase. So there are ways to increase both of course to increase the average order value. For example, you may look at anything from adjusting prices to bundling products to increase your order size. Similarily to increase the average number of times a customer will purchase. There are ways to increase the average such as staying in touch after the initial purchase through email or staying in touch through social media. However, for the follow up campaigns to be effective, something must happen first, when you are either an Ecommerce or your professional service business, the customer must be happy with the initial deliverability. To illustrate my point, I'm going to share with you two stories. One of a professional surface a recent visit to a dude ranch that I took with my family and one of an Ecommerce order that I placed with some for some fancy light bulbs last week. First the recent stay to a dude ranch. So last weekend to celebrate the end of school. Our family decided to take a weekend vacation. And inspired by the movie City Slickers. I was watching I decided to do a Google search for dude ranch. About a week before our trip is most due I clicked on the very first paid ad that appeared inside Google which happened to be for a dude ranch outside of Santa Barbara about 100 miles away. After reviewing their website and reading their reviews, paying particular close attention to their negative reviews, and confirming availability, we made the reservation. So this process highlighted many key elements and producing good conversion rates when you're using paid ads. The keywords that they were using to advertise were relevant to my search. Their bid was high enough to put them in top space and Google's they had a high ad rank. Their ad was well written earning the click and their website was easy to navigate showing off their services and facilities. And just as important they had a good number of reviews with the five star reviews outnumbering the one star, the ratio about 10 to one. So to add it all up, they earned the conversion of a weekend booking and with the conversion value in my case for them around $1,200. I would imagine that their return on adspend their ROAS and the return on investment or ROI must be really good. However, as we discussed earlier, these metrics are just the beginning and not the end. In order to see the entire picture business owner must calculate their CLTV their customer lifetime value. For this day, the hotel CLTV will be determined by increasing the order value, how much additional money to get spend during their visit, and increasing the average number of times that guests will return for Future states organically without doing a Google search, so just go directly to the website. So at this hotel, the horse riding was separate. So there was little opportunity for the hotel to increase their average order value. And all the meals were included with the state. So again, very little opportunity there. And in fact, the only things I could say to increase the average order value was the bar in the vending machine. Now there are some creative ways such as partnering with other experiences in the area other than the horse riding, that may be able to increase their value. But overall, there was very little for the hotel to work with. So for this hotel, the CLTV the customer lifetime value would be highly reliant on increasing their profitability by increasing the average number of times the return purchase, aka the average number of times that a guest is going to return in the future. So the hotel it was owner operated and they were friendly. In addition, the hotel included some nice accommodations. Were not riding horses, there was a small but nicely maintained swimming pool and a game room that the kids enjoyed. However, there also was a few things that downgraded the experience. They included in the including offenders that I saw it as the meals they were not as quality as advertised. The dining room was set up using some cheap folding chairs and some matching cheap plastic folding tables and the mattresses at night and the bedding were very old and they were springs poking through. And in both the eating area and the cabins there were some ants and spiders and they were they were roaming freely. Now, I realize this was a rustic experience, I don't want to come across too picky. And it would have been fine if it was to star prices. But especially in southern California, when you are charging five star prices, then your customers are going to expect five star service and five star accommodations. Now with just a few changes, a five star experience could have been fairly easily achieved, and most of the groundwork was already in place. Now the stable on the other hand, which was not connected to the hotel, went out of the way to provide a great experience. So my wife and son they went on an hour and a half horseback ride. So very disruptive, she was not old enough to go on the ride my five year old, she was overjoyed when the manager of the horse stable, put her on her horse and walked around the paddock for 10 minutes, just a simple kind thing to do to increase your customer service. The bottom line was that as we drove home, I asked my wife if she would like to stay at the Dude Ranch again. And her answer was this. Next time, we should stay at a different hotel in Santa Barbara, and then come up and ride the horses the stable. So how'd I was thinking that this is a common answer though, and it's definitely one that's dragging down the CLTV of the Dude Ranch. With some easy fixes and taking into account what their customers want. This hotel would most likely see their CLTV and their profit levels skyrocket. An Ecommerce order that I recently made last week was for these fancy light bulbs. When my office was constructed a few years back the contract had ordered these big round, decorative light bulbs is finishing touch. As with all light bulbs, one day, it blew out and I had to search for a replacement another light bulb. So like the Dude Ranch, I again did a Google search this time, it was just for a search for the model number the light ball. Through Google Shopping I found three stores that carry this specific light bulb I needed and they were all at the same price. I clicked on the shopping app from the first retailer which shows the importance of Ad Rank and I went ahead and placed my order. Now during the checkout process I was ordered I was offered a four pack of standard light bulbs for $4.99 with no increased shipping. So it sounded like a good deal is typically a four pack in the store I find is closer to 10 bucks. So I therefore I added the light bulb pack to my order and this increase the order value which is a you remember was one of the ways to increase your CLTV as well as a way to obviously increase your ROAS and your ROI. So my order it took about two weeks to arrive which you know in this day and age to bid excessive for shipping time but I had five other light bulbs that were working in my office, so I didn't mind too much. When I received my order it was in a plain brown box and within the box was nicely packed with the light bulbs I ordered. What was not in the box, nothing else no catalog, no offer for more products no card thanking me for my order do offer for a discount for a future order. Nothing but the order and fact they did not even include a receipt or invoice for the order. The only way for me to see who the merchant was with whom I had placed the order was to look at my email or look at my credit card statement. This company this company Again, had a great paid shopping ad campaign, they had a great website, and they did a good job getting me to increase my order value. However, they missed a big opportunity to better connect during their most important piece of the initial experience, which is the deliverability. In the restaurant business, it is a proven fact that if someone dines with you, there is a 25% chance they will return. If they dine with you a second time, there's a 30% chance they will return. If they dine with you a third time, get this, there is a 90% chance that will return. Now, I'm not sure of the exact numbers for Ecommerce. But in my experience, it's something very similar. And if you know the percentage of likelihood for repeat business goes up drastically with each purchase, Then shouldn't you do everything in your power to try to get that second and third order. So this company paid for the initial conversion when I made the purchase. However, remember, the CLTV is determined by the average number of times that a customer purchases in their lifetime. So I'm going to need more fancy light bulbs in the future. It's just just a matter of time, it's one of those things. However, when I need one of those fancy light bulbs, I'm going to do another Google search for the model number. Even now, just a week after my initial order, I do not know the name of the merchant with whom I placed that order. If I knew the merchants name, I would very likely go directly to their website, because I know they have the light bulbs that I need. Now I may very well end up with one of their competitors, simply because when I placed the order, I'm not sure who fulfilled the first order. And to be frank, I don't really care. The fact is, where this merchant could do better and could find an opportunity to increase their CLTV and thus their overall profitability. So final word. As a business owner, your business is increasing your profitability, and a surefire way to do this is to increase your customer lifetime value CLTV. Remember, to increase your CLTV you need to either increase the average order value or increase the average number of times that a customer will purchase from you. Here are two rules to consider when providing your deliverable. One, deliver your goods and service as if it was your mother who ordered it. Number two, do everything everything in your power to make it easy for a customer to order with you again. For both the Dude Ranch and the fancy light bulb retailer, they both missed a huge opportunity to increase their CLTV through their deliverables as they did not follow those two rules. So take a few minutes now and write down those rules where you can see them and look, look at your own deliverables. Are you following those rules? Are you delivering your goods and services as if your mother was the one that ordered it? And do you do everything in your power to make it easy for a customer to order with you again? Do you follow these rules? Or is it likely your mother would not place that second order with you? That's it for today. If you liked this episode, please go to the Apple Apple podcast and leave us a five star review. And if you're looking for better results using Google Shopping, just like that fancy light bulb company, check out my new book Make Each Click Count Using Google Shopping. It's available on Amazon or on my website www.makeeachcount.com That's it stay safe thanks and happy marketing.