The world of eCommerce is a competitive one and a successful marketing strategy is one of the best ways to get ahead.
It’s simple to say that marketing strategy is important, but much more difficult to determine which marketing strategy is best for you. Thankfully, this can be much easier when you’re making good use of data and statistics.
Many marketing techniques focus on increasing Average Order Value, or AOV. AOV isn’t the only important eCommerce metric to measure, though. Increasing your customers’ Lifetime Value, or LTV, could be key to long-lasting success.
Here, we discuss AOV and LTV, as well as the best ways to improve both metrics for bottom line profitability.
AOV, or average order value, is exactly what it sounds like: the average dollar amount of an individual order or transaction in your online store.
AOV is an important metric to be aware of in determining how much any one transaction is worth to you. When you know your AOV, you know how much to expect to make from a new, first-time customer to eCommerce store. Knowing your AOV can help you decide how much effort you can afford to put into marketing that will likely lead to one-time purchases.
To calculate AOV, start with the dollar amount of your total revenue. Then, divide that number by the total number of orders placed. The result of this is an average value of how much customers spend on each separate purchase.
AOV takes into account how much you’re making per order and how many orders you process overall. However, AOV does not take into account how many individual customers have engaged with you or the production costs associated with your goods or products.
For instance, the calculations used for AOV don’t take into account any percentage paid to credit card companies, the cost of production, or shipping costs. This makes a high AOV important, so that you’re still making a profit after these other costs are taken into account. The Average Order Profit, or AOP, does take these factors into account. AOP may be a better metric to use when looking at profit instead of simply revenue.
AOV is important because you’re making more money when your AOV is higher. Higher revenue allows you to pay for any associated production costs, marketing, or other expenses.
The higher your AOV, the less important it is to spend time and resources finding new customers. When each customer is likely to spend more money, you need fewer of them. With fewer customers, you can focus more on perfecting the customer experience for those that you do have.
AOV is increased via mechanical changes. These mechanical changes can include:
Customer Lifetime Value, or LTV, takes into account more than an individual order. LTV is a measure of the revenue generated by a single customer over the course of all of their involvement with your company.
While gross LTV refers to the revenue generated by a single customer over their lifetime, net LTV takes into account production and processing costs. Net LTV, then, measures total profit per customer.
I recommend measuring net LTV, not gross LTV. To do this, you’ll need an accurate measurement of the cost of production, distribution, and marketing.
To begin with, you’ll calculate gross profit. You can do this by subtracting all COGS (cost of goods sold), shipping fees, transaction fees, refunds, and discount codes from total revenue.
Then, multiple gross profit by the number of orders placed in a year. This result is an annual customer value.
Net LTV is this customer value multiplied by average customer lifespan.
LTV is more important if your eCommerce store has a high purchase frequency and large customer base. When these measures are lower, it’s likely easier to see patterns that are otherwise found with this calculation.
LTV is important because it helps determine the worth of a customer. With high LTVs, you need fewer customers to make the same amount of money overall. Knowing your customers’ LTV gives you a better idea of how much money you can spend on acquiring new customers. You can compare marketing costs with LTV and balance accordingly.
While AOV is adjusted by mechanical changes, LTV is adjusted with organic changes. This is because LTV is essentially a quantitative measure of customer satisfaction, rather than a quantitative measure of the price or profit of a single order. Customer satisfaction is improved via organic changes.
Instead of choosing between AOV and LTV, it’s important to know when to use each measurement.
AOV can be an important metric in determining what types of items are most popular. An AOV that’s lower than the price of many store items may indicate that the lower-price items are more popular. If the higher-price items have a higher profit margin, you may need to market them differently or better.
LTV is important in deciding how much to spend on customer acquisition. Deciding on marketing costs can be tricky, but knowing how much each customer is worth can be helpful in deciding how much to spend to draw them in.
Different business models will focus more on the value that relates to their product. A company may focus more on AOV if they sell wedding dresses or dining sets, which are usually one-time purchases. A company may focus on LTV if they sell books or clothes, as these customers could return to buy more.
Many wholesale suppliers will also focus primarily on AOV, as a customer purchasing large amounts of a product likely won’t need more of it any time soon.
For both types of products, though, both measurements may be important at some point. It’s important to never discount the value of one metric just because the other seems more useful in the moment.
There’s no one way to Organically Maximize Your Customer Lifetime Value, but there are many tried and true techniques that could bring you one step closer. Once you’ve tried some of these techniques, you can decide what works best for your eCommerce brand, product, and customers. Consider the following strategies:
Whether LTV or AOV plays a more prominent role in your day to day functions as an eCommerce store, data plays a huge role.
There’s plenty of data to be found and analyzed, and finding a tool that can make both finding and analyzing this data simple and quick is vital. With a tool like this, you can be sure that you aren’t missing out on important patterns or data points among your sales and customers. You can determine what processes are most profitable for you and which are dead weight, allowing you to streamline your company into what your customers want and what benefits you most.
Keeping this eCommerce data at your fingertips and using the right tools to track and analyze it can boost both customer satisfaction and profitability.