The secret to a successful ecommerce business on Shopify: understanding LTV
Getting people to sign up for the product is hard. It requires a lot of...
You’ve probably noticed the acronym LTV (which stands for lifetime value of a customer) comes up frequently within the ecommerce space. There’s a reason for that. A study conducted on top-performing businesses found that on average, the LTV of those top businesses was five times higher than other companies.
These companies are clearly onto something by focusing on driving up their LTV. But...how? And why?
Most ecommerce merchants have a basic understanding of what LTV is, but we’re here to go deep and talk about why it’s so important to an ecommerce business, how to calculate it, and how to effectively utilize it to increase the profitability of an ecommerce operation.
LTV is defined as the lifetime value of a customer (sometimes called CLV or CLTV). LTV is a key performance indicator tied to the total amount of money a customer brings to a business over their lifetime. From a zoomed out perspective, LTV can illustrate how much a customer is worth to a brand, offering unparalleled insight into their overall value.
Once you access this number, you’ll have a better understanding of where you should invest to increase customer retention moving forward. To put it into perspective, the top 1% of ecommerce customers can be worth up to 18 times more than the average customer. Customer value is not the same across the board, and knowing your LTV will help you narrow down which ones are the most valuable to you.
Furthermore, LTV offers insight into which customers you can expect to become repeat customers. Those with a higher LTV are likely fans of your company and will continue to purchase products from you, while those with a lower LTV are more likely to be one-time purchasers.
While the process of calculating LTV is more complicated than the formula makes it seem, the concept of it is straightforward: To calculate LTV, take the gross profit per order and multiply that by the lifetime orders per customer. As an equation, it looks like this:
LTV = Average net revenues per order x Average # of orders x Customer lifespan
Now, you might be thinking: what does ‘lifetime’ refer to?
The answer is: it varies.
For early-stage brands that don’t have much historical data, LTV can be calculated on a shorter timeframe. Generally speaking, however, a customer's lifetime value is calculated over a time period of two to three years.
You can’t talk about LTV without talking about CAC (customer acquisition rate).
CAC refers to the amount of money it costs to get a customer to purchase a product. For a business to be successful (i.e., to make more money than it spends) the LTV must be higher than the CAC.
Ideally, a healthy LTV:CAC ratio will be at least 3:1. This means that the value of your customer should be three times more than it costs to acquire them. If the customer is only making you as much as you’re paying to acquire them (a 1:1 ratio), then your spend rate is too high.
Knowing this data and analyzing it properly can give brands a better sense of what kind of money they should be spending on advertising.
If you know what your customers spend per year on your brand, you can estimate more accurately how much you should spend converting them to purchase. LTV will also show you which customers to focus on and why.
For example: if you find your LTV is low, it might be a sign to focus more on increasing your retention rate and average order value rather than investing in more expensive conversion ads. On the other hand, if your LTV is high, it gives you the flexibility to spend more on customer acquisition.
While it’s necessary to keep track of daily sales and revenue, these metrics don’t provide more than a single snapshot of business performance.
To understand what’s really going on with customer trends, you need to look deeper. LTV is an incredible metric that can help predict your business’s future success and help companies understand the true value of its customers.
So why is the value of your customer necessary to know? One word: retention.
“An ongoing relationship with your customer makes 10-100xing LTV over time very doable.”
-Austin Rief, Founder of Morning Brew
Long-term business sustainability is all about getting repeat customers in place.
The aforementioned study found that by their second year, the top-performing businesses were earning over half their revenue from repeat customers. That means there’s a lot more value in repeat customers than in those who only purchase once.
Remember: The most valuable customers for any business spend up to 30x more than an average customer.
If you want your ecommerce business to succeed for the long haul, knowing how much your customers are worth is critical.
It’s a good idea to keep track of your LTV as part of this, as if you don’t pay attention to it, you’ll likely miss out on long-term growth opportunities (because LTV clues you into the big picture). Not monitoring your LTV can ultimately lead to wasting time and money on customers who don’t bring in as much revenue as others.
The lesson here is: increase your retention rate and use insights from your LTV to figure out how to do it.
While the formula makes LTV seem simple, it can be a complicated and time-consuming metric to calculate when you don’t have an on-call data analyst.
This is why utilizing technology that brings all your data together and analyzes it can be extremely helpful. It’s exactly what Polar Analytics does as a full-stack business intelligence tool.
Not your average B2B SaaS company, Polar Analytics has an expert understanding of how ecommerce works. The platform was built from a marketer’s perspective and is focused on providing a place where all data can live for quick assessment and expert analysis.
Polar Analytics provides a close look at LTV, giving brands the ability to filter based on qualifiers like first product purchased, first collection, or month of acquisition.
We all know there is a never-ending amount of data to collect. Collecting data isn’t often the problem, though. The difficulty is in drawing actionable insights from all that data.
This is where Polar Analytics comes in, automatically calculating your customer LTV once you connect your Shopify account (as seen above and below), along with identifying improvements with retention or specific issues with retention.
By comparing customer purchase history with customer LTV, Polar Analytics pinpoints which products are driving customer loyalty and leading to repeat purchases and which ones aren’t.
Utilizing this information will improve your business’s retention and LTV, helping you hone in on what products and customers to focus on as well as where any problems might be—ultimately giving you a deeper understanding of your company’s present and future profitability.
By now, you’ve got a good idea of what LTV is, why keeping track of it is essential to the health of your ecommerce business, how Polar Analytics helps calculate it, and how to use it to optimize your marketing efforts with the information it provides.
While cliché to say, time is money, and Polar Analytics helps you save yours and grow your business at the same time. Ringing in at a lower cost than other marketing dashboards and data analysts, Polar Analytics also offers a free demo for the curious.
At the end of the day, growing a business is about knowing your customers through and through. The comprehensive insight and overview LTV provides regarding customer behavior is one of the most solid customer metrics that exist for ecommerce business owners.
In this post, you'll discover how consumer brands moved from Marketplaces to the need for Independence. What is the issue with current BI tools, and why do they need help to scale? We will talk our Mission, Vision, and what's next ;)
From marketplaces to independence
A marketplace was required to sell online from the 1990s through the early 2000s. The first online marketplace, Book Stacks Unlimited, was launched in 1992, followed by Amazon three years later. Alibaba debuted in 1999. The usual business model was for brands to pay around 15% fees to the marketplace in exchange for distribution and web presence.
They had no other options since establishing a store, receiving payments, and finding consumers online was very difficult at the time. But the world changed in the last 10 years. Shopify was founded in 2009, allowing anyone to open a store online. Then Facebook Ads debuted in 2011, turning distribution into a commodity and making it possible for anyone to locate consumers online. In 2011, Stripe made it simple to collect payments.
This is a major shift. Consumer brands can now opt to forego the 15% fees they used to pay to marketplaces and instead invest in technology partners, which offers them complete control over their customer experience and independence.
And this trend is accelerating! In 2020 the market share of Amazon declined vs. the Independent Alliance for the first time!
Source: Accel D2C Report
While supporting independent businesses is inspiring, it's also beneficial to society.
A virtuous cycle for consumers and society
A new form of consumer brand has emerged in the last decade: Digital Native Vertical Brands. By cutting middlemen in all areas of their business, from the factory to consumer, they are able to keep costs down, while providing high-quality products. (If you have doubts, take a look at this 350€ handmade textured leather bag from Polène).
So while Brands become independent, customers can benefit from more affordable products with higher quality. And society as a whole benefits from a more decentralized tissue of brands rather than a couple of big giants. And by controlling the materials, they are able to provide more local and environmentally friendly products, as shown with the B Corp certification received by Allbirds.
From the first sale to a successful brand
While Shopify, Stripe, or Facebook Ads have reduced the barrier to entry. It is still difficult to scale an independent brand.
As a result, several new technological partners have emerged for an ecosystem that has matured, enabling these brands to evolve from the first online sale to a multi-million dollar success. Klaviyo helps with email marketing, Gorgias provides advanced Customer Helpdesk, and Yotpo provides advanced Marketing tools. But they are still flying blind when it comes to Data.
The problem with current tooling
According to a Gartner Study, analytics team spend more time wrangling data than building insights. And that's even more true for DTC brands that have very limited to no analytics teams. Manually pulling data rather than focusing on analyses (1 day per week) is wasting their time and flying blind. E-commerce managers are frequently overworked.
Following the introduction of Redshift in 2012, the initial genesis of the modern data stack began. At the time, firms were moving to the Cloud and the market for cloud-based data tools, was so small that players had no other options but to create narrow horizontal solutions that served all kind of businesses (as long as they stored their data in the cloud). Tools like Looker, Data Studio, Super Metrics or Metabase emerged during this time.
While this first wave helped with adoption, building a modern data stack for an e-commerce brand comes as a result with stitching together technical and expensive tools. And for the ones that do it, it becomes hard to maintain and still doesn't do a great job at empowering business users to save time making the right decisions for, who often prefer a good old spreadsheet.
But by now, these products are ready to act as a foundation on which successive innovations can be built.
"Empower consumer brands to compete with retail giants - through data"
Polar Analytics is a Full-Stack Business Intelligence Solution for Consumer Brands. A powerful, yet simple solution for business users to get the insights they need to succeed and make the right decisions.
Let's take a look at Full-stack and its three core blocks:
Providing essential services: Monitoring, analyzing, sharing, and improving KPIs.
All of this is made possible because we concentrate on the commerce vertical and develop for platforms like Shopify.
We partnered with over 100+ brands in over 10 countries in less than 12 months, collecting a 5/5 average customer rating on the Shopify app store.
We want to build the #1 winning solution in the market and support 100,000 merchants by 2030.
We're looking for talented Software Engineers, Brand Marketers, and E-commerce Experts who are eager to work on a team with a culture that is built around Ownership, Egolessness, and Growth. We hope you enjoyed reading this post; if so, there's so much more to discover and learn on this journey!
Looking at different ecommerce metrics is like gazing into the night sky: there are so many data points you can (and should) track that the information available feels...infinite.
Connecting and integrating data across different channels and platforms can be a full-time job, and as a result, teams are constantly playing catch-up with all of the numbers and data points they’re tracking across spreadsheets and dashboards.
Almost half of the marketing leaders surveyed for the Gartner Marketing Analytics survey said that some of their most expensive and experienced analysts and data scientists spend their time preparing data to be analyzed rather than analyzing the data:
“Some of the most skilled analytics talent spends their time doing work that is necessary but not necessarily the work that will drive competitive differentiation and breakthrough insights. Analysts don’t have the time, tools, or processes to execute on their vision.”
The question is, what can businesses do to improve their ecommerce analytics efficiency?
Enter an ecommerce dashboard.
What is an ecommerce dashboard?
An ecommerce dashboard is a central report with all the essential key performance indicators (KPIs) that ecommerce businesses need to make informed decisions.
Even digitally-native brands struggle to stay on top of the huge amount of data they gather on a daily basis. The role of an ecommerce dashboard is to centralize all the data businesses have to get a clear picture of the direction in which they are moving.
Why do tech-savy businesses need ecommerce analytics?
Managing a modern online business without ecommerce analytics can feel like walking in a dark tunnel. You won’t be able to reach your goal if you don’t have lights to guide you.
Ecommerce analytics signal when something is not right, giving you the chance to fix issues and double down on initiatives that perform well.
Here’re some of the fundamental reasons why businesses need ecommerce analytics:
Attract new customers
The ecommerce competition is fierce. No matter how the digital landscape evolves, attracting new customers remains an essential task for every online business. In order to attract customers, you have to understand their behavior as well as their needs and wants.
Data is the key. Unlike in the past when businesses had limited insights about their customers, today, thanks to data analytics, tracking the buyer’s journey and analyzing how customers interact with a brand will help pave the way to new customers.
Retain loyal customers
You can never fill a leaky bucket to the top. Finding the right formula for bringing new customers without the ability to make them stay is not enough. The influx of new businesses emphasized the importance of having a solid base of raving fans that want to stick around for the long run.
But how do you convert one-time buyers to loyal customers? Meet (or better yet, exceed) their expectations. The only way to do so is data. Analyze insights to understand what matters to your target audience and streamline your strategy based on the feedback.
Manage your inventory
Businesses that are incapable of handling their inventory fail fast without exception. Speed and convenience are two of the most important pillars of ecommerce. In a world of instant gratification, being unable to fulfill an order means losing customers.
The good news is that data can help. Good inventory management depends on ecommerce analytics. From knowing when to reorder to forecasting and inventory planning, with ecommerce analytics, your business can stay on track.
Create personalized experiences
Companies that fail to provide personalized shopping experiences will ultimately go out of business. Data from Accenture shows that 91% of consumers are more likely to shop with brands who recognize, remember, and provide relevant offers and recommendations.
The truth is, personalization is not an easy task. Fortunately, with ecommerce analytics, companies can gather the insights they need to create special offers, targeted ads, cross-selling and up-selling strategies, and a myriad of other tailored experiences.
Optimize your product portfolio
The best way to create a product portfolio that resonates with your target audience is to measure the pulse of your customers. Based on previous buyer behavior, businesses can make informed decisions for future product development.
What are your bestsellers, and what are your worst performing products? Identifying them can help you optimize your product portfolio and set you for future growth.
Make data-driven business decisions
Unlike retail, where you can use intuitive, experience-based methods, in ecommerce, data is the prerequisite for good decision-making. There’s no such thing as luck in ecommerce.
Instead of taking a wild guess, tech-savvy businesses analyze insights, detect patterns, make data-driven decisions and optimize along the way.
Future-proof your business
Imagine if you had the tools and the capacity to predict the future. What would you do with that crystal ball? With ecommerce analytics, businesses can replace assumptions with data-backed plans for the future and boost the bottom line.
When it comes to the KPIs that should be included in an ecommerce dashboard, marketing managers and ecommerce business owners often find themselves overwhelmed with numbers and categories.
To make your life easier, we’ve put together a list of the most important KPIs that should be part of your ecommerce dashboard.
A good starting point is to get a global overview of your business and understand the basic KPIs that can make or break your business. Based on this information, you can make data-driven business decisions.
Performance Marketing KPIs
Measuring performance should be at the core of every ecommerce business. Monitoring acquisition, retention, and profitability should be the baseline for measuring your marketing performance.
Businesses that want to succeed in a digital-first world have to focus on keeping customers engaged. Based on their engagement, you’ll be able to personalize their experience and retain loyal customers.
Being aware of the strengths and weaknesses of your products is the catalyst to optimizing your product portfolio and strategically managing inventory. Companies that don’t track product KPIs end up guessing the winners and losers in their portfolio.
Now that you know all the essential KPIs that you should be tracking, the next step is building an ecommerce dashboard. However, many ecommerce businesses struggle with this task.
Why is that the case?
You need to pull together fragmented tools
Today’s data infrastructure is increasingly complex. Tech-savvy businesses are juggling tools and platforms to track, collect, and analyze data that will ultimately equip them to make informed decisions and future-proof their business.
Unifying all the data can seem like an impossible task. From Connectors, Data Modelers, and Cloud Data Warehouses to Visualization tools and AI Assistants—dealing with complex software systems can cause marketers even more confusion.
Staying on top of all these tools is either costly (no less than $100,000 per year) or low quality (because of the limitations in free tools).
Requires technical knowledge and a team of data engineers to implement
Complex data systems require technical skills and knowledge. One way to handle this is by hiring a team of data analysts, data engineers, and machine learning engineers to take charge of the data infrastructure.
But even when you do so, because of the complexity they will dedicate most of their time to gathering data and unifying all the information, instead of analyzing.
Complete manual process that takes all of your time
Tackling data manually is another way to approach building an ecommerce dashboard. However, this approach can take you days and even whole weeks. It’s inefficient, daunting, and it can be a horrorshow.
The good news is that there’s a smarter way to approach ecommerce analytics.
Now you can build your marketing dashboard by integrating data, visualizing it, and getting smart insights all in one app.
To build an ecommerce dashboard, you need to integrate data from multiple sources, which is time-consuming and difficult. Polar Analytics comes with 17+ pre-built integrations like Shopify, GA, Facebook Ads, Google Ads, Recharge, Klaviyo, and more.
In a great ecommerce dashboard, there is data on CAC and LTV because these are the lifeblood of D2C. Polar Analytics automatically aggregates marketing spend to have CAC day by day and model Lifetime Value and Cohorts seamlessly without manual work.
An ecommerce dashboard is static, but your business is moving. Polar Analytics comes with daily reports, dynamic alerts, and insights so that you never miss an issue affecting your revenue or customer experience ever again. This way, you get a better monitoring and forecasting model.
Without ecommerce analytics, understanding online customer behavior can feel like a black box.
Though gathering data is vital for every ecommerce brand, the only way to improve your business performance is to understand the insights and take action on what you learn.
Now you can create your ecommerce dashboard in five minutes. Schedule your free demo and learn how.