What Do Top E-Commerce Companies Have in Common? (Hint: It’s NOT a High Conversion Rate)

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Every e-commerce marketer wants to be able to determine how many dollars they are getting back for every $1 dollar they put into a marketing channel or campaign. This is why the foundation of every successful digital marketing strategy is built upon an accurate understanding of Return On Investment (ROI). This is so important that it’s Lesson #1 of the WordStream PPC Guide for Beginners.

However, marketers tend to make two very common mistakes when optimizing for ROI:

Overly focusing on Conversion Rate Optimization (CRO)

In Larry Kim’s excellent post “Everything You Know About Conversion Rate Optimization is Wrong,” he recommends that marketers “F%A# conversion rates.” Kim’s point is this:

“Higher conversion rates, on their face, seem awesome. However, if you’re converting less qualified leads, you’re actually throwing MORE money away, because those leads cost you money.”

In other words, instead of wasting time optimizing a specific e-commerce landing page or campaign, make sure your hard work is turning into business results – ROI.

Measuring marketing ROI based on first transaction

Measuring ROI based on first transaction is a step up from focusing on CRO alone; you’re now measuring spend vs. just conversion rates, but it still doesn’t tell you what campaigns are bringing in your highest value customers – the kind that spend again, and again, and again. The only way to find those campaigns is using Customer Lifetime Value (CLV), and here is where we get to what top e-commerce companies have in common.

What top e-commerce companies have in common

Research in our 2015 Ecommerce Benchmark Report shows that e-commerce companies in the top revenue growth quartile have CLV that is 5x higher.

 customer lifetime value graph showing that e-commerce companies in the top revenue growth quartile have clv 5x higher

Best-in-class companies like BaubleBar, Jackthreads, and Hmall.ma measure every marketing endeavor against this key metric. So what is it?

Simply put, Customer Lifetime Value is the sum of all the purchases a customer makes with you. For example, if a customer only makes one purchase for $150, that customer’s CLV is $150. If a different customer makes seven purchases, each for $50, that customer’s CLV is $350. There are big differences between the customer who purchases once, the customer who purchases a few times, and the customer who purchases over and over again.

Now, here’s how to put this powerful metric to use in identifying the campaigns bringing in your very best customers.

If You’re Not Using CLV to Calculate Your ROI, You’re Doing It Wrong

If you’re measuring ROI using first transaction only, your metrics will be skewed by customers who made an expensive first purchase or campaigns that brought in more customers.

customer lifetime value the wrong way to calculate roi image by campaign type 

Measuring ROI using Customer Lifetime Value allows you to identify the campaigns that are bringing in your highest value customers.

customer lifetime value the right way to calculate roi 

Measuring ROI using CLV takes a little more work on your part, but it’s the only way to ensure that your optimization efforts will turn into business impact, not just higher conversion rates. If you’d like some help getting started on this, we wrote a comprehensive guide on how to calculate ROI using CLV.

Webinar: How to Double Your Paid Search ROI

Research from Kenshoo states that cost per click from search advertising has increased 7% year-over-year, and social advertising an astonishing 114%. It’s hard, and expensive, work acquiring new customers, but it’s worth it. Conversion Rate Optimization alone will never be enough to keep you competitive with top performing companies.

To learn more about using customer lifetime value to maximize your marketing ROI, don’t miss our upcoming event with WordStream, “How to 2x Your Paid Search ROI Without More Conversions.” It’s going to be packed with data-driven tips on how to get more value from your PPC spend.

About the author

David is a content marketer at RJMetrics with a background in creative writing, SEO, and content strategy. He believes a story gets better when it's wrapped around data. Follow him on Twitter: @davidmintowilly

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Comments

gracie
Feb 12, 2015

If using CLV for ROI, what do you use for investment? A life time value of a customer, is likely to have multiple advertising channels engaged along the purchasing journey, ie. they may have clicked on search ads several times, facebook ads, in house email, external paid email, print ads, catalogs, tv, radio, etc. Most of the times, the purpose of ROI is to determine how effective a single channel is to make a decision. Using CLV is likely to inflate ROI, which is not true results of this single channel. Thoughts?

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