Customer lifetime value (LTV or CLTV) is a useful metric for a lot of things in Shopify.
One area where I like to urge caution with it in as part of your customer acquisition budget.
The common advice is to make sure you spend less to acquire a customer than what they contribute to your profit.
It makes business sense right?
If a customer contributes $100 of profit to your store, you don’t want to pay more than $100 to acquire them.
Using lifetime value this way is dangerous for two reasons.
First, each customer’s lifetime value is unique. One customer might be worth $50, while another is worth $150. So when LTV is brought up in conversations about customer acquisition, they really mean the average LTV of your customers.
The problem is, are the customers you’re acquiring average? Or will they spend more? Or less? Who knows?
You can try a channel for a few months, calculate how much customers were averaging, and then find out you’ve been burning money. (Or Increasing Facebook and Google’s Shareholder Value)
Second, lifetime value is based on the lifetime of that customer. One customer might just make one purchase, in which case you’ll earn their entire value right away. Another customer might be purchasing over the next 3 years and you’re only getting a small amount each time.
If you acquired this repeat customer based on the amount they spend over 3 years (their LTV), you could be overspending to acquire them and run out of cash.
Running out of cash is a big killer of business. It’s easy to be profitable but run out of cash and have to close up shop.
Some advice to counter this is to only spend up to a percentage of the customer’s lifetime value, 33% is a common number in software saas companies. That’s safer than the full 100% but what percentage makes sense for you? Who knows.
An easier way is to ignore the lifetime value completely.
Instead, look at what your average first purchase order value is and your product margins. Not your storewide AOV, just the first purchase (repeat and loyal customers tend to spend more).
By using your first order’s value you can apply your current conversion rate and know how much to spend right now.
Max acquisition cost = First order value * margin * conversion rate
Max acquisition cost = $80 * 25% margin * 3% conversion rate
Max acquisition cost = $0.60 per customer
Or $0.60 per visitor (or click).
So you spend $60, get 100 visitors, 3 end up spending $80 each, and you made $20 in profit for each which balances your cost.
With this strategy it’s also easy to adjust your numbers. If you’ve boosted your order sizes, improved your margin, or optimized your conversion rates, you can easily plug in the new numbers and adjust your spending. No need to wait for a new cohort of customers to come through to see what their lifetime value is.
Using this method, any repeat orders then become extra profit.
And who likes extra profit?
If you haven’t installed Repeat Customer Insights yet, it’s an easy way to get a detailed look at your customer behavior including the average value of their first orders.
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