A Practical Example
Standard practice on Amazon is to focus on your products. This is what Amazon reporting prioritizes, and it's useful to understand your most profitable ASINs. However, thinking about customers first — specifically, which customers of yours are the most profitable and important — can dramatically shift your strategy for the better. What’s the best metric for understanding your customers’ activity? Customer Lifetime Value (CLV).
Calculating CLV makes you think, not just about a sale, but about the entire customer journey: where, when, for how much, and how often do your customers buy your products. In other words, it identifies your ‘profit per customer’ over their entire lifecycle with your brand. Once you have that information, you can put it to excellent use to grow your business.
While CLV is important in all Amazon marketplace activities, it has a particular place when it comes to strategizing how you can grow your business. This article is a guide on how to use CLV effectively to do just that.
Suggested reading: The importance of truly understanding your customers in the Amazon marketplace is paramount, we believe this so strongly that we’ve actually created an entire eBook about what true understanding looks like in data, how to disseminate behavior, and why you should strive to do so. Check it out here — Your Guide on How to Make Sense of your Amazon Customer Data
Why do accurate CLV calculations promote growth?
CLV is a customer-centric metric and a powerful base to build upon for valuable customer retention, increase revenue from less valuable customers, and improve the overall customer experience. There are fundamentally two ways to grow your business on Amazon:
1. Retain existing high-value customers by:
- Reducing churn by targeting offers and promotions
- Incentivizing customer loyalty
- Improving your operational weak points
- Considering losing less productive customers to focus on the more profitable ones
- Moving existing customers to higher-value sales
- Spending the right amount to gain the customers who are most valuable to you
- Reviewing your product portfolio to target best spenders
All this is possible if you use CLV to the best effect. Accurately calculated CLVs will allow you to appropriately segment your customers based on long-term value, which in turn informs your customers acquisition strategy — particularly when and where you should be spending more or less. What’s more, you can more easily identify the products that lead to long-term profits and in general, which hold more promotional value as they contribute to a higher CLV. When you know this information, you can accurately form product bundles that are directly applicable to your customer segments, and overall offer more value to your customers, increasing their value to you.
Pro tip: Leveraging the power of CLV will only reap the best rewards when it is calculated properly, and that can be quite tricky. Luckily, we’ve created a guide that explains exactly how you calculate CLV and the tools you need to do that effectively, check it out here — How does Nozzle Calculate CLV?
So, let's look at the steps you need to take to formulate and execute a growth plan based on CLV.
How to effectively run a CLV-adjusted growth plan
Step 1: Audit the account
With an array of campaigns, ad groups, keywords, products and budgets, you have an array of variables to control and change. Sometimes it isn't easy to know where to start — sometimes the areas of growth are not immediately or intuitively obvious. CLV will help, but before you can calculate CLV for growth, you need to get the data and audit your current and past performance.
The areas to focus on include:
- ASINs: Find those which are performing well. This will be your overall product pool to determine your growth plan.
- Top 2 ASINs as % of Total Sales: These are your "Hero" ASINs that you need to nurture and also protect.
- Total Sales: Essential to recognize that on Amazon, organic and ad sales are two sides of the same coin.
- Ad Sales: We need to understand what sales are being generated from ads directly.
- Ad Spend: This is one lever that you have to affect ACoS, and will be used to calculate that metric (below). When ad spend is accurately applied to ACoS, you can know where your ad money has the most impact.
- ACoS: Calculated by Amazon based on the assumption that you will only ever make one sale of that product — so it doesn’t offer long-term value visibility. But it will still form the benchmark for your growth decisions.
- TACoS: Adopting an effective Amazon TACoS strategy is vital. After all, Amazon PPC impacts organic results — the TACoS metric helps you to optimize ad-spend and boost both paid and organic results.
- Ad Sales as a % of Total Sales: Percentage of PPC budget breakdown — you need total granularity and visibility to understand where your PPC is being spent.
- Search terms: Look at your converting search terms to ensure your search terms are optimized and working well.
Step 2: Identify growth potential
This process identifies your most significant growth potential ASINs. To do this, follow this mini-guide…
First, find ASINs that have the highest % of sales coming from repeats — AKA the ASINs that have the most potential to build CLV. These are ASINs that will help you grow your business or that you want to grow in profit/visibility.
Next, identify supplementary or support ASINs that are helpful to the campaign. These can be:
- Random ASINs to grow your information about your products and expand your data-driven understanding of performance.
- Particular ASINs that you want to promote that do not fall under ‘Growth’ or ‘Hero’. They could be new products, upgrades, or limited editions.
Third, remove outliers (scarce data, outdated ASINs). Top tip: be ruthless! There is a strong case for focusing on the data that really matters — basically, "seeing the wood for the trees."
Fourth, ensure fundamentals are understood (CVR %, ratings, reviews, inventory). CLV is a long-term indicator of business health. But to build long-lasting relationships, you must ensure that your essentials are sound.
Finally, identify the ‘First Purchase ←→ CAC profitability gap’ for each ASIN. This is to see which sales are costing the most and the least money at the start, therefore those holding the most potential.
All you have to do now is decide on the type of growth you want to pursue (they aren't mutually exclusive and will depend more on the sectors and business you have).
1. For CAC-driven growth:
You prioritize those ASINs with the most significant profitability gap — these will be the products that have the most scope for you to outflank the competition and decrease your Customer Acquisition Cost (CAC) over time with repeat purchases.
Pro tip: If you’re unsure on what CAC is, how to calculate it or how it relates to CLV, check out our blog — An introduction to CLV and CAC on Amazon
2. For organic new-to-business (N2B) sales:
Use Hero ASINs. You are getting more sales from these products, which will increase your organic product ranking in Amazon's search engine. In the long run, that's what you want. You want to get the most from your advertising money to increase your organic rank, so in the future, you can divert your PPC budget to other more growth-related targets.
Use customer data to grow your business.
Whatever growth you want to pursue, Nozzle gives you the insights you need to make the business decisions that drive growth. Start your free trial with us to find out what we can do for you.
Step 3: Create the plan
Your plan should consist of two phases:
Phase 1: Structure preparation
- Set your goal and budget.
- Improve your marketing campaign basics, e.g. campaign structure, budget allocation, while maintaining the current performance and funds.
- De-risk campaign changes by mitigating a spike in ACoS.
- When migrating terms from auto to manual, set a low budget in manual and slowly increase funding as you gather data.
- Using negative keywords will reduce ACoS by serving the ad to the relevant audiences. But they don’t negate all the converting terms in research. You should wait for the performance campaign to gain relevancy and data before negating the converting terms.
- Set-up for experiments to help the planning and execution of the growth plan
- Align on the campaign goals, primary KPIs, budgets.
- Sign off on the growth plan.
Phase 2: Execution preparation
- Optimize PPC for the identified ASINs (growth and hero) for N2B customers to allow you to gain market share against competitors.
- Perform and optimize extensive keyword research and aim primarily at non-branded terms.
- Identify the most effective keywords based on search volume, cost-per-click, or CPC, (from the test) and conversion rate.
Step 4: Execute the plan
Execution can also be broken down into two phases — for fine-tuning and then ramping up:
Phase 1: Improve fundamentals and align on goals
- Timing: Ensure you have enough time allocated in the plan to fine-tune and learn. In weeks 1-2 you want to focus on campaign restructuring. In week three, this is where you should set aside a small budget to test CPCs for optimal new strategic terms that will aid in the planning and execution of growth.
- Budgets: Keep budget as standard for this phase.
- Key KPIs: Maintain or improve ACoS and improve ads conversion rate (CVR).
- Hero ASINs: Focus on the main two Hero ASINs.
- PPC Products: Concentrate on Sponsored Products (part of the group of Amazon Sponsored Brand Ads).
Phase 2: Execute Growth Plan to hit goals, fast
- Budgets: Move budget considerations from the preparation step to a comprehensive budget for the entire growth plan. Ideally, you want to focus 50% of your budget on two Hero ASINs, 25% on two Growth ASINs and 25% on three Support ASINs.
- Monitor key KPIs: These will include total sales, market share and, as aforementioned, always keep an eye on TACoS.
- Non-branded keywords: Focus on high volume non-branded keywords and bid to gain appropriate visibility.
- Broaden sponsored scope: Move from just Sponsored Products and introduce Sponsored Brands, Display, and Video.
- Rinse and repeat until goals are achieved: Ensure that you maintain a ‘test and learn’ approach.
What you'll need to do this yourself
We have shown that CLV is a complicated metric and a powerful growth vehicle. You use CLV to build a clear and accurate picture of your products and where they could be with respect to customer value. Finding and accessing this kind of data on Amazon to build up this picture is a significant challenge. There are many factors you have to keep on top of:
- Knowing where to capture customer and product data (and Amazon don't make this easy).
- Being able to attribute profit to a customer over their entire lifetime sensibly.
- Having sufficient data to forecast lifetime value (LTV) based on past behavior.
- Generating models of behavior that match the data well.
And it all needs to be carried out at speed for you to benefit.
To do all of the above so you can truly understand CLV and customer buying trajectories, you should really have at your disposal:
- An insights tool: Data-crunching for accurate CLV calculation will probably go beyond in-house capabilities. You will need third-party analytics tools to calculate CLV and provide 24/7 monitoring and optimization, long-term CAC monitoring, and ASIN level analysis of performance.
- CLV experts: Amazon expertise on how to calculate and effectively apply metrics to growth plans.
- Growth experts: Industry expertise on how to effectively realize, manage and report on growth strategies.
Pro tip: Nozzle offers two kinds of service — self-service and managed service — the two forms of expertise listed above are part of the managed offering in addition to the insights tool. The self-service plan is all about the insights capabilities.
To execute at scale, you need to deploy the right skills, software, and working practices to become customer-focused.
You need Nozzle
At Nozzle, we’re made up of Amazon and AI experts. We solve CLV problems by tapping into Amazon APIs to crunch the numbers using proprietary AI algorithms and then presenting the figures back in customizable dashboards.
As well as providing AI-enhanced PPC services, we've also developed an analytics tool that can pull product-specific information to help you understand product-specific CLV and calculate the average buying trajectories of customers. Overall, we offer unparalleled access to persona analytics, we can help Sellers see customer activity through a data-driven, transparent lens that offers exhaustive access into your business performance. Start by booking your demo today for a managed service introduction or joining the waitlist if you’re interested in self-service! Get your growth plan underway today!