Your best customers spend 30x more than your average customers. That’s what we found when we analyzed data from millions of online shoppers at hundreds of the fastest-growing online retailers. This huge differential between your best and average customers illustrates just how important it is to identify your best customers and tune your acquisition strategies for them.

A very common way that marketers measure ROI is based on first transaction. We call this “the easy way”. The problem with measuring ROI in this way is that it won’t help you identify the channels or campaigns that are bringing in those super-high-value customers.

Let’s look at how this breaks down:

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Calculating ROI the Easy Way

ROI is measured as:

ROI = (dollars in revenue)/(dollars spent) - 1 

Let’s do that using a hypothetical scenario. You’ve been spending $400 a month on paid search and investing $5,000 on writing blog posts to boost organic rankings. You do some quick tallying:

ROI the Easy Way (First Transaction)

 

Organic Search

Paid Search

Number of customers acquired

24

3

Average Order Value

$150

$150

Total Revenue

$3,600

450

Marketing Investment

$4,000

$400

ROI

-10%

13%

Obviously, you’re losing money on your inbound efforts. So you make a business decision -  you stop writing blog posts. Instead you dump that $4000 you were spending on organic search into paid and sit back to watch the money come rolling in, right? Not so fast.

Turns out, in this fictional scenario, that a paid search customer never becomes a repeat buyer. You’re now spending $4000 every month to acquire one-time customers. That’s an awful way to spend your marketing money. It’s also why it’s worth measuring ROI not just on the quantity of customers, but also on the quality.

Calculating ROI the Right Way

Finding ROI the right way means that you need to combine your web analytics tools with the data stored in your order processing system. The information in your order processing system will allow you to look beyond a single transaction and get insight into repeat purchases - this is the key to finding a powerful little metric known as Customer Lifetime Value (CLV).

Customer Lifetime Value is how you identify you locate your best customers, the one’s that spend 30x more than your average customers. Customer Lifetime Value is the most important metric you have to evaluate your marketing performance. The concept is simple, a customer’s lifetime value is the sum of their purchases.

To find this information you go back to your database. You find the channel or campaign a customer was acquired through then add up the sum of all of their purchases. Now when you measure the ROI of a channel the formula is:

ROI = (CLV/ad spend)-1

Calculating your channel ROI with CLV, you see very different results:

ROI the Right Way (Customer Lifetime Value)

 

Organic Search

Paid Search

Number of customers acquired

24

3

Average Order Value

$150

$150

Total Revenue

$16,800

$450

Marketing Investment

$4,000

$400

ROI

320%

13%

Clearly, your organic search customers are delivering the kind of ROI you want. You look at the data and make a marketing decision to end your paid search marketing and instead double your organic search investment. If you had made the decision in scenario one, in a year’s time your revenue would be $59,400. If you made the decision based on CLV your revenue in a year’s time would be $302,400. That’s the power of finding and investing in your best customers.

Janessa Lantz is a data-driven marketer at RJMetrics, a company that provides business intelligence software for ecommerce and SaaS companies. You can follow RJMetrics on Twitter @RJMetrics.

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Originally published Nov 19, 2013 10:00:00 AM, updated June 20 2019

Topics:

Ecommerce