According to Peter Drucker: “The purpose of a business is to create and keep a customer.'' Customer Lifetime Value (CLV) is a measure of that purpose; a prediction of the net profit attributed to the future relationship with your customer. By knowing CLV, you can make important business decisions about sales, marketing, product development, and customer support with more confidence.
As an Amazon Seller or Vendor, CLV is especially important. As far as Amazon is concerned, anyone buying through Amazon is an Amazon customer rather than yours — so data about customers is hard to come by — and direct communication with purchasers outside of the Amazon platform can lead to being blacklisted from the platform. So, you have to be clever about the data you glean about purchasers of your product and clever about how to use that CLV data to turn them into long-term customers of yours.
Where is CLV used?
CLV is mainly used to manage customer acquisition cost and enhance customer relationship management. It is usually calculated on a per-customer basis and has traditionally been determined for an average customer within a particular market segment or category — the average CLV.
Ultimately, maximizing CLV is critical to the success of your business. Not all revenue is created equal, and it’s easier (and less expensive) to retain a customer than acquire a new one. By working to increase CLV, you increase the profitability of your entire operation.
Customer Lifetime Value ultimately comes down to 'sales trajectories'. In other words, being able to predict what customers will buy next, and the likelihood of a repeat purchase. This obviously has a number of benefits in terms of crafting targeted ads — something that can help you increase and maximize customer lifetime value.
However, understanding the average customer lifetime value associated with different products allows you to think with far longer-term trajectories about customer acquisition costs. For example, if a beauty brand knows that an average customer will purchase a specific lipstick six times in their lifetime, ad campaigns can be crafted with that in mind. It becomes practical to pay more on PPC ads (out-bidding your competition) to acquire a customer and even take a loss on the first purchase knowing that there will be a second/third/fourth purchase.
The same kind of repeat purchase strategy can be developed around the purchase of other products. For example, looking at how many repeat purchases of razor blade refills customers make on average after purchasing a razor blade will tell you the real value of selling that razor blade.
For customer relationship management, you can potentially decide on a differentiated approach for different segments. For example, ensuring the fastest response for long-term customers. Before looking at how Customer Lifetime Value is calculated, it’s also worth considering some basic elements of customer value: Recency, Frequency, and Monetary Value (RFM).
- Recency: The last time that a customer made a purchase.
- Frequency: How many times a purchase is made in each time frame.
- Monetary Value: The amount of money a customer has spent within that same time frame.
Segmenting customers with RFM, enables you to analyze each group individually and match that with the set of customers that has the highest CLV.
Ultimately, being able to predict what customers will want next, creating hyper-targeted ads, and knowing which products will generate a maximum customer lifetime value helps direct your entire Amazon marketing and listing strategy. You can even create retargeting campaigns based around products that a persona has “missed” within their expected buying trajectory -- using an understanding of CLV to maximize your CLV. This can be done using both Amazon DSP and sponsored ad posts.
So, how do you calculate customer lifetime value on Amazon?
How to calculate CLV
There are two calculation methods for CLV:
Simple — which is good for quick calculation and provides general ballpark figures.
Complete — which is calculated on a year-by-year or even month-by-month basis, can factor in models of changing revenues and costs, and can use a discount rate (comparing projected ROI of different investment possibilities) to calculate present value.
What information do you need to calculate them?
- Initial cost of customer acquisition - for example: $10
- Annual revenue contribution per customer - for example: $20
- Associated product costs - for example $6
- Annual direct costs per customer - for example: $1
- Annual customer retention rate - for example 80%
In this case, your CLV calculation would start by determining annual profits. That is the annual revenue contribution - product costs - annual direct cost (e.g. customer service and ads). In this case, that would be: $20 - $6 - $1 = $13 annual profit.
Then you need to use your annual retention rate to determine your average customer lifetime period. With an annual retention rate of 80%, that comes out to 5 years using the following calculation:
(100%/(100%-80%)) = (100%/20%) = 5 years
You can then use the customer lifetime period and the known acquisition costs to get a total CLV:
CLV = $13 (profit) * 5 (lifetime period) - $10 (acquisition cost) = $55
But it’s not that easy: finding this data in your Amazon account is a challenge.
Robust CLV calculations can be achieved if you’re able to capture customer and product data, and are able to attribute profit to a customer over their entire lifetime. You also need sufficient data to forecast lifetime value based on past behavior to date. Models of behavior also need to match the data reasonably well and it all needs to be done fast for you to benefit.
How to calculate individual CLV
Going beyond a rough overview of CLV and diving into individual and product-level analysis presents a huge challenge. Ultimately, this is not a task that can be done by hand (specifically if you want to keep the information up to date), and it’s not information that is currently provided in Amazon Seller Central.
To go beyond aggregate CLV calculations, you need to harness the power of machine learning tools and third-party analytics software. The good news is that accessing this kind of Amazon analytics solution has never been easier.
Investing in an Amazon analytics tool will help you make sense of all of your Amazon customer data. Critically, however, the right investment will deliver detailed insights into product-specific CLV calculations, and persona-based calculations — all of which will let you put your data to the best possible use. Best of all, this information gets delivered in a simple dashboard, meaning you can focus all of your energy on putting that data to work.
Putting your CLV to work
A rough estimate of your customer lifetime value figures is a good start. However, armed with detailed and granular CLV figures, you’ll be able to build smarter, more efficient campaigns by optimizing your spending and fine-tuning your targeting. A good understanding of CLV on Amazon will help you achieve and track five main things:
1. Segmenting your customers
By grouping your sales data into different segments, you can figure out what calls to action, text or triggers helped to push your best customers into buying for the first time.
Traditional approaches to segmentation focused mainly on demographic attributes such as gender or age. But just understanding who your customer is isn’t enough anymore.
By looking at customers as personas across product categories, you can take actions to put more effort into specific aspects of your marketing. For example, knowing the demographic information and purchase patterns of customers that buy cat food (as compared to dog food) lets you improve targeting in each regard. Whether that’s PPC ads or tailored content, that information will help you win more high-quality customers with high lifetime values.
2. Manage cost per acquisition
One of the primary uses for CLV is to help keep your Cost Per Acquisition as low as possible. The difference between your Customer Lifetime Value and your Cost Per Acquisition is your Return on Investment, or ROI. That’s the amount of money you get out of a customer relationship after you’ve deducted the money that you spent to start the relationship in the first place. To stay profitable, you’ll need to maximize your ROI.
If you know your CLV, you’ll also be able to figure out how much you can afford to spend on paid ad campaigns. For instance, if your Customer Lifetime Value is $100 and the conversion rate for one of your marketing campaigns is 20%, then your maximum bid for that campaign should be 20% of $100.
3. Cross-sell and Upsell
Amazon has attributed up to 35% of its revenue to cross-selling, both through its “Frequently Bought Together” and “Customers Who Bought This Item Also Bought” features.
Cross-selling and upselling are closely related because they both focus on providing additional value to customers, rather than limiting them to products they have already considered or purchased. The key to success in both is to use CLV to understand what your customers value most and then respond with bundles, hyper-targeted ads, or individual products that meet those needs at the right time.
For example, if you run a pet-supply shop and discover that a particular range of well-performing cat toys are regularly purchased at the same time as cat collars (or regularly purchased two months later), you have a number of powerful options at your disposal. First, you could create a product bundle. Second, you could target purchases of your cat collars (and toys) with display ads for the other product. Lastly, you purchase sponsored product ads against branded search terms for the other product — using CLV information to profit from your competitor’s brand strength.
4. Focus on the customer
One of the most effective ways to boost Customer Lifetime Value (CLV) is to increase customer satisfaction. Bain & Co has claimed that a 5% increase in customer satisfaction can increase CLV by 25% to 95%.
Happy customers spend more — it’s that simple. Customer service and engaging with prospective customers with high CLV should always be your top priority. Amazon allows customers to ask questions directly on the product page, which is a great way to connect with customers.
5. Increase your CLV
Lastly, a good understanding of your CLV is critical to increasing your CLV. By understanding how different products perform, and how different product lines interact with each other, you can make sure that your resources are best placed to optimize long-term growth. Ultimately, the increased profit margins from cross-selling and upselling mean that an optimized CLV is central to performance.
The right customer at the right time
CLV is one of the most valuable pieces of data to have on your customers and will allow you to make quick refinements and scale your profits accordingly.
For example, converting a high CLV customer from “browsing” to completing a transaction can be as simple as providing a short response to any queries they might have. As Amazon advises to its sellers, “Providing timely, high-quality responses to buyer inquiries is an important factor in buyer satisfaction.”
Amazon also measures and reports a seller’s average response time, so it’s best to respond to all inquiries in less than 24 hours.
Knowing the importance of CLV will allow your customer service teams to focus more time and effort on high-value customers, increasing your ROI and improving relationships with your long-term customers at the same time.
CLV gives you crucial insight into how much money you should be spending on acquiring your customers by telling you how much value they’ll bring to your business in the long run. You’ll be able to understand which customers you should be focusing on and, more importantly, why you should be focusing on them.
Success isn’t about finding customers — it’s about finding the right customers at the right time. Now that you can calculate the lifetime value of your current customer base, you’ll be able to start crafting campaigns that target and win over those customers that really make a difference to your bottom line.