Figuring out your Customer Life Time Value

Customer Life Time ValueAs a marketer and executive there are various Key Performance Indicators (KPIs) that I tend to follow. One of these KPIs is our customer’s Life Time Value (LTV). The life time value in short is the amount of money an average customer from your chosen segment will spend in the coming years minus the dollars you spent getting that customer to your store. This KPI can help you gauge certain marketing channels, and enable you to distribute resources according to pre-determined customer segments.

But how do you figure out your customer LTV? I thought you’d never ask…

Customer LTV is a function of your Segment Size, Gross Margin, Average Order Value (AOV), Acquisition Cost and the number of orders per customer over a set amount of time.

Here is the function to consider:

LTV = [(AOV * Avg Number of Orders * Gross Margin) / (Segment Size)] – Acquisition Cost

In the example above, we have a segment size of 50,000 customers coming from a certain channel with an acquisition cost of $78.00. If we look at a 1 year span, the average customer orders 1.39 times a year with an average order size of $208.82. With a Gross Margin of 60% the LTV of this segment is $174.16. As you look at a larger time span, the number of orders per customer gets larger; therefore, the life time value grows as well. On a 5 Year span the Life Time Value of the Customer grows to $251.02.

The LTV is a very important KPI, and the time span you choose to determine LTV, depends on your business goals, your industry and the product or services you are selling. There are many ways to “skin this cat”, this is the method I find to be most quick and easy, and I use it consistently to help me determine marketing efforts and helps us segment our Top 20 VIP Customers. How do you use LTV? What time span is right for you and your industry?

Improve Your Conversion Rate with a Manufacturing Approach

Conversion Rate with a Manufacturing ApproachWhen we hear words like “continuous improvement” and “reducing defects,” we typically think of a manufacturing operation. However, ecommerce merchants can take the same approach and apply manufacturing concepts to ecommerce conversion-rate improvement.

Valuing Visitor Actions
Every action by a visitor to your website has a certain value. A sale is value-based on the average revenue or gross profit; a lead is valued-based on percentages that convert over time. For example, assume a close ratio — also called a “conversion rate” — on a website is 1 percent and it is equal to $100,000 of value, from a marketing spend of $20,000. If we can increase the close ratio to 2 percent, we will get — for the same marketing spend — $200,000 worth of value. If we increased sales without improving conversion then we would have likely had to increase marketing expense, which would have decreased or destroyed profitability. But using close-ratio improvement allows us to grow sales without increasing expenses, which allows the company to now invest in many other aspects that create additional growth.
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How to Calculate BO-GO for the Books and Returns

Buy on get one free promotions - calculating for the books...“Buy-one-get-one free of equal or lesser value” is a promotional tactic used by many retailers. I recently used it in a promotion and we had to develop a way to insert these transactions into the books and calculate returns if needed.

After coming up with the algorithm, I thought it might interest other business owners/ merchandisers running the same type of promotion:

To calculate the sale, you need to take into account the percentage off each pair of products bought. Make the total of each pair and then find the percentage off each of the items.

For example: a customer buys 6 products.

  1. Item 1:$69.50
  2. Item 2:$44.50
  3. Item 3:$129.00
  4. Item 4:$106.00
  5. Item 5:$178.00
  6. Item 6:$166.00

The total cost: $693.00
To calculate the discount you need to sort the Items by price:

  1. Item 2:$44.50
  2. Item 1:$69.50
  3. Item 4:$106.00
  4. Item 3:$129.00
  5. Item 6:$166.00
  6. Item 5:$178.00

Then you can see that the total discount would be the $44.50+$106.00+$166.00 = $316.50 So the total transaction would be: $376.50

However, what happens in the books? what would happen if the customer chooses to return item #3? What should he be reimbursed?

To calculate you should have your POS configured for such a promotion. If you have your own in house POS, then you need to insert the following algorithm:

You need to calculate the individual discount for each item in the list.
To do so, you need to pair up again and find the percentage off each items of the pairs.
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