What is 'profit per customer'?
Profit per customer, most commonly referred to as Customer Lifetime Value, is a metric you can use to determine what investments you need to make to attract new Amazon customers and keep existing ones. Customer Lifetime Value (CLV) can also help you identify pain points in the customer journey that increase churn rates. So, among the many customers a brand can attract, CLV helps sellers allocate resources appropriately to maintain the most value-added customer relationships.
Customer Lifetime Value (CLV) informs you about your plan to acquire new Amazon customers and helps you allocate loyalty resources to increase profit margins. Customer Lifetime Value (CLV, also known as CLTV) is the estimated total net income a company will earn per customer over its lifetime. The CLV of the entire relationship is a growth metric used to predict the net return on a future relationship with a customer.
CLV is a projection of how much net income your business can generate over time from a customer or type of customer. CLV identifies the exact customers that will bring you the most revenue, allowing you to target your marketing funds to increase your ROI. Basically, CLV helps you pinpoint what makes your customers happy so you can do it again.
Why should I care about it?
Understanding CLV will help you focus on your customer and find a complete approach to the sales funnel that will help differentiate from the competition and help you identify your business's biggest challenges, such as product quality and customer engagement. Knowing CLV will help you make important business decisions regarding sales, marketing, product development, and customer service with greater confidence. Having your customer data and communicating with them will improve your brand, which in turn will increase your profit-per-customer.
Selling on Amazon is becoming increasingly like a battle-ground, but with the right data to hand, you can improve existing products and customer touchpoints, as well as identify different ways and approaches to advertise and optimize your products that will increase your CLV, and ultimately boost the profits of your Amazon brand. Knowing your customers' interests, understanding what products they are looking for will help you improve your existing products and customer touchpoints. Just be sure to use the data you've collected about a particular customer to make recommendations that match that customer's purchase history and interests.
For example, knowing the demographics and buying patterns of customers who buy cat food (versus dog food) allows you to improve your targeting in every way. Also, while understanding customer needs and buying behavior can help you create specific ads that will target them to your product, how your product is sold and presented on the Amazon page is just as important. By treating customers as people across all product categories, you can focus more on specific aspects of your marketing on Amazon. This also means of course, that you will reduce any wasted ad spend by shifting your focus from a scattergun approach, to a much more targeted strategy which you know you can rely on.
Whether your targeting in every aspect is PPC advertising or personalized content, this information will help you reach more high-quality, long-term customers. Ultimately, being able to predict what customers want next, create hyper-targeted ads, and understand which products will create the most value for customers helps guide Amazon's entire marketing and go-to-market strategy. The key to cross-sell and up-sell success is to use CLV to understand what your customers like most, and then respond at the right time with bundles, hypertargeted ads, or a single product that meets those needs.
Understanding CLV allows you to devote more time and energy to valuable customers, increase your ROI, and improve long-term customer relationships. In addition, by increasing customer loyalty (and increasing CLV) more effectively, you can spend more on customer acquisition and still make a profit in the long run. Acquiring a new customer can be 5-25 times more expensive than retaining an existing one, and increasing customer retention by as little as 5% can increase business profits by a whopping 25%.
If you want to maximize your profits and grow your business in the long run, you need to grow and retain your customer base. Most small business owners have limited resources, so when it comes to increasing repeat sales, you need to focus your efforts on the customers who will bring you the most. If I want to increase my profits, I must focus all my efforts on our best clients.
Ok, but what does it all mean?
Here's an example: let's say that according to my data my largest customer, who spends over $120 per order, accounts for nearly half of my total sales. In other words, most of my clients spend less than half the average cost of my typical order. You may also have heard statistics such as the top 1% of e-commerce customers are worth 18 times more than the average customer. If you know how much revenue your business generates from each new customer, you can decide how best to scale your business and improve your bottom line and bottom line.
You know that approximately 80 percent of your future income will come from 20 percent of your most loyal customers and that a 5 percent increase in customer retention can lead to an astonishing 25-95 percent increase in revenue. You need to be smart about the data you collect about your product buyers and how you can use that CLV data to turn them into loyal customers. Understanding CLV will help you understand the interests of your customers. CLV is a magical metric that gives you valuable customer insights, sets you apart from your competitors, enhances your sales and marketing strategies, and increases your bottom line.
By calculating CLV, you can better manage things like customer acquisition costs, customer relationships, and sales trajectories. You can calculate CLV for individual customers and segments. The traditional way to measure CLV is to multiply the expected average order value by the expected frequency of purchases per year and by the number of years the customer is expected to stay that way. You can, of course, calculate your customer lifetime value/profit per customer yourself...so long as you can collect customer and product data, and you can attribute profits to customers throughout their life cycle. Unfortunately, Amazon doesn't make it very easy for Amazon sellers to get hold of this information - and even when you have the data to hand, it can be a lot of work to figure out accurately what your customer lifetime value is.
Gathering this information can increase your broader contextual understanding of your customers and products, helping you improve your CLV when calculating your customer acquisition cost (CAC). CLV enables you to spend more on targeted customer acquisition, delivering high PPC spend while generating long-term revenue.
Find out for yourself how working out your profit per customer can help you scale your Amazon business with your free trial of Nozzle analytics.