How important is customer lifetime value to Amazon?

How important is customer lifetime value to Amazon?

Welcome to our blog post, where we explore the crucial concept of Customer Lifetime Value (CLV) in e-commerce. In this article, we are thrilled to include insights from Michael and Joe Shelerud of Ad Advance. They will explain what Customer Lifetime Value (CLV) is and why it’s crucial for businesses online.

By knowing about CLV, companies can track their long-term success and adjust their marketing plans to make more money and keep customers coming back.

Everything covered in the article:

What is Customer Lifetime Value in Amazon Advertising?

Customer Lifetime Value (CLV) is the total amount of money a customer is expected to spend on your products during their relationship with your company. It’s a crucial metric that helps businesses understand the long-term value of their customers, beyond just the first purchase.

In the context of Amazon advertising, CLV helps you understand how much a customer is worth in the long run. This can guide how much you’re willing to spend on advertising to attract each customer. For instance, if you know a customer will spend $100 over their lifetime with your business, you might decide it’s worth spending $10 to acquire them through advertising.

Make a note of it: this perspective can help you optimize your ad spend and target customers who will bring the most value over time.

Consumer Value (and all other CBBE components and relations among them)

Where is Сustomer Lifetime Value used?

Customer Lifetime Value has many benefits. For example, it helps you:

  1. Invest more in branding ads.
  2. Compete for top ad spots and boost your organic ranking for more sales.
  3. Quickly get new customers, even if it costs you initially, knowing you’ll make a profit within a certain time and break-even ACoS.

But CLV does even more. It helps you:

  1. Plan your cash flow for buying inventory, launching products, and big holiday ad campaigns.
  2. Expand your market share and become a stronger brand.

CLV isn’t just about PPC bids. It helps you make important decisions about sales, marketing, products, and customer support. For example, it can answer questions like:

  1. How much should you spend to get a new customer?
  2. How can you offer products and services that your best customers will love?
  3. How much should you spend to keep a customer coming back?
  4. Which customers are worth spending the most to get?
  5. What’s the best experience for Amazon customers?

How Do Repeat Purchases Increase Amazon Profits?

In Amazon advertising, understanding Customer Lifetime Value (CLV) is key for businesses looking to succeed. Typically, companies think about the cost of getting a customer based on one purchase. But they miss out if they don’t consider the customer’s repeat purchases, which can really boost profitability.

Imagine a customer buys a $20 item. If they keep coming back, they might spend $40 or more over time. This means the business can spend more to attract each customer because they know they’ll make more money from them in the long run. This is especially important on Amazon where advertising costs are going up, making it harder to make a profit on just one sale.

Successful brands on Amazon use this strategy by focusing not just on the first sale, but on getting customers to come back. This approach helps them spend more on ads without losing money, allowing them to beat out competitors who only focus on the first purchase. 

How to calculate Сustomer Lifetime Value for Amazon PPC?

Understanding how much your customers are worth over time, including how to calculate customer lifetime value, is super important in Amazon PPC advertising. Here’s a simple way to figure it out:

  • First, gather data from your Amazon PPC campaigns.

You’ll need to know things like how much you spend on ads, how much customers spend on average, and how many keep coming back to buy again.

  • Then, figure out how much it costs you to get a new customer through your PPC ads.

This is your Customer Acquisition Cost (CAC). Divide your total ad spend by the number of new customers you got.

  • Next, find out how much money each customer spends on average per order.

This is your Average Order Value (AOV). Just divide your total revenue from PPC ads by the number of orders.

  • Now, look at how many customers stick around and keep buying from you over time.

This is your Customer Retention Rate. It’s the percentage of customers who come back for more after their first purchase from your ads.

  • Finally, put it all together to find your Customer Lifetime Value (CLV).

Use this formula: CLV = (AOV × Customer Retention Rate) / (1 – Customer Retention Rate).

Keep checking and updating your CLV regularly as things change. It’ll help you make smart decisions about your PPC campaigns and keep your business growing strong on Amazon.

How Can You Keep Customers for the Long Term?

In markets like phone cases where many products seem the same, building brand loyalty is tough. However, some brands stand out by focusing on keeping customers for the long term, not just making a single sale.

OtterBox is a great example of this. They make tough phone cases and have built a strong brand that people trust and come back to. They can charge more because customers believe in their quality. OtterBox stays visible with ads on Google, a strong presence on Amazon, and a big following on social media. This keeps them in customers’ minds even when they’re not looking to buy right away.

For other brands looking to be more like OtterBox, investing in marketing and quality is key. This strategy helps build a trusted brand that can attract loyal customers. Although it costs more upfront, the long-term benefits of having loyal customers who are willing to pay more can outweigh these costs.

How Can You Build a Loyal Customer Base on Amazon?

Building a loyal customer base today means offering great products and smartly expanding your range. Take OtterBox, for example. They started with tough phone cases and earned a reputation for quality. Then, they used this trust to sell new products like chargers and earbuds.

For new brands, the lesson is clear: focus first on making one excellent product. Once people trust your brand, introduce more items. This strategy helps sell more products to the same customers, increasing what they spend with you over time.

In marketing, it’s about thinking long-term, encouraging customers to keep coming back by offering them more of what they already like.

How Can You Effectively Expand Your Product Line on Amazon?

Starting a brand on Amazon doesn’t mean launching with many products. Begin with one great product and expand slowly. 

Look at OtterBox: they show that starting small and expanding carefully can build a strong brand on Amazon.

To find new product ideas, use tools like Amazon’s Product Opportunity Explorer. This tool helps spot trends and gaps in the market. Also, check your search term reports on Amazon to see what customers are searching for that you don’t yet offer. These insights can lead to smart product additions.

In short, grow your Amazon store by starting with one solid product and slowly adding more based on customer data and market trends. 

Product Opportunity Explorer

How Can Building a Community Increase Customer Lifetime Value?

In today’s crowded market, just selling a good product might not be enough. One smart way to stand out is by building a community around your product. For example, imagine a solo entrepreneur who sold basic kitchen gadgets like vegetable peelers while building a lively online community centered around cooking and kitchen tips.

How Can Building a Community Increase Customer Lifetime Value?

This community wasn’t just about the products. It was a place where cooking enthusiasts could chat, share tips, and even help pick out new kitchen gadgets. This turned customers into more than just shoppers. They became active members of a community that was just as passionate about cooking as the entrepreneur.

By linking the product with a community, the entrepreneur added more value to the purchase, making the kitchen gadgets more appealing and unique compared to similar products from other sellers. This strategy helped build customer loyalty and set the brand apart from competitors.

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Can Amazon’s Dashboard Boost Customer Lifetime Value?

Using Customer Lifetime Value (CLV) in your advertising strategy can really change how you spend your marketing money, especially on platforms like Amazon. By understanding how often customers come back to buy again, you can make smarter choices about your ads.

Let’s say you sell a health supplement. You might spend $20 on ads to sell one bottle. If that customer comes back to buy four more bottles, the money you spent on ads is now worth a lot more because that customer keeps buying. Initially, you might think you’re just breaking even, but those repeat purchases make the initial ad spend profitable.

Using tools like Amazon’s Customer Loyalty Analytics Dashboard can show you how often customers make repeat purchases. Even if only 3% of customers come back to buy again, those extra sales can boost your profits without spending more on ads.

Amazon's Customer Loyalty Analytics Dashboard

This means setting your ad cost targets not just based on the first sale but considering how much customers might spend over time.

In short, thinking about CLV helps you understand the real value of customers, allowing you to invest wisely in getting and keeping them. 

Should We Change Our Ad Goals When Things Aren’t Clear?

When we’re not sure if our ads are working, what do we do?

That’s the big question. Especially for new-to-brand ads, it gets tricky when people search for our brand. Should we just ignore these ads? Some say we should keep it simple and stick to hitting our target ACOS. But should we change our goals when things aren’t clear?

It depends on what we’re selling. If it’s something people only buy once, then we focus on how much our ads are actually selling. But even then, it’s hard to know for sure.

Imagine if we had two worlds: one where people see our ads and one where they don’t. Then we could really see if our ads make a difference.

Think about when we’re trying to defend our brand against competitors. How do we know if our ads are working?

We use a Search Query Performance Report that shows us what people are searching for. By looking at this report, we can see if our ads are helping us win more customers or not.

Summary

At Amazon, we understand that every customer is not just a transaction today, but an investment in our future. This is where the true essence of Customer Lifetime Value lies. It’s about recognizing the long-term impact of each customer interaction and the value they bring to our business over time.

At Amazon, every customer counts for today and tomorrow. That's the real value of CLV.

Michael Erickson Facchin, CEO

In Amazon Ads, always remember the value of each customer over their lifetime. Effective strategies should focus on building and maintaining long-term relationships with customers to ensure steady revenue in the future. Provide personalized support and offers.

Got questions about selling on Amazon? Our friendly Amazon PPC Management Service team is here to help! We specialize in everything from setting up ad campaigns to improving your sales. Let us make your products shine on Amazon.

The PPC Den Podcast

If you enjoy supplementing your long reads with audio or video, we cover this topic on our podcast as well, The PPC Den.

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