Mastering Customer Lifetime Value on Amazon [Updated for 2022]
Brands, big and small, are increasing their advertising budgets on Amazon. As a result, there is fierce competition for ad space and rising prices. In addition, aggregator firms are acquiring Amazon Sellers and they too are wielding large ad budgets.
According to Marketplace Pulse, advertising cost on Amazon is up 30% from the start of the year and over 50% year-over-year.1 To succeed, you need to find a way to compete on different terms. One way is by leveraging the power of Customer Lifetime Value (CLV).
To stay ahead on Amazon, you must use all the Amazon Seller tools at your disposal. Amazon provides lots of reports to Sellers, but they are fragmented and difficult to process. They don’t easily provide the insight that is going to make your company stand out and win. Fortunately, the data is there to calculate CLV, you just need the right analytics tools to unlock the gems hidden in the data.
We saw a gap with regards to CLV calculations and built Nozzle to solve this problem. A commitment to the effective use of CLV and its absence from existing Amazon Marketplace reporting processes are what motivated us to create the Nozzle tool in the first place. We’ve seen CLV transform Amazon strategies and this article will show you how it happens.
What is CLV?
Customer Lifetime Value ultimately comes down to 'sales trajectories.’ In other words, being able to predict what customers will buy next and increase customer repeat purchases. CLV is the secret ingredient to enable Sellers to manage their customer acquisition costs and build customer relationships.
Understanding the average customer lifetime value associated with different products allows Sellers to think with far longer-term trajectories about customer acquisition costs (CAC). For example, if a brand knows that the average purchase rate per customer for a specific product was four times in their lifetime, ad campaigns and customer service can be crafted with that in mind.
It becomes practical to pay more on PPC ads (outbidding your competition) to acquire a customer or even take a loss on the first purchase knowing that there will be a second/third/fourth purchase.
Ultimately, maximizing CLV is critical to your long term (and short term) success. Not all revenue is created equal. In the white-hot heat of Amazon marketplace competition, it's easier and less expensive to retain a customer than acquire a new one, resulting in increased profit margins. It is also better to shorten repeat purchase cycles and optimize ad effectiveness.
Where is CLV used?
There are many benefits associated with leveraging CLV. For example, you can:
- Invest more in your branding ads.
- Compete for the top spot in ads and increase organic ranking to drive more organic sales.
- Acquire customers quickly, possibly at a loss, safe in the knowledge that you'll become profitable at a defined period that fits with your risk profile and break-even ACoS (more of that later.)
But CLV delivers more. You can:
- Forecast cash flow to finance for inventory purchases, product launches, and big holiday ad spending.
- Do a market land grab and become the strongest brand.
CLV isn't only about PPC bids. It guides vital decisions about sales, marketing, product development, and customer support. For example, it can help answer critical questions for you such as:
- How much should you be spending to acquire a customer?
- How can you offer products and services tailored for your best customers?
- How much should you spend to service and retain a customer?
- What types of customers should you spend the most on trying to acquire?
- What is the ideal customer experience for an Amazon customer?
For this article, we'll focus mainly on using CLV for ad success. If you want a profitable Amazon business, you need to be on top of your break-even ACoS (Advertising Cost of Sale.) Simply put, it's the amount you can spend on advertising and still break even given your product margin.
If you have $25 ad spend and a revenue of $100, your ACoS would be 25%.
And if your cost of goods sold were $60, then your break-even ACoS would be 40% ($40) —the same as your profit margin.
So far, so good. Now let's consider that this single ad connects with a customer you know will buy your product three more times on average. Your break-even ACoS now becomes $160 ($400-$240.)
So, you could spend $160 upfront on the same ad and still be at your CLV-adjusted break-even ACoS.
A break-even point change means you can push competitive bidding while still making sure that you make a profit. A $25 ad spend is now generating $400 of revenue — giving you an ACoS of 6.25% rather than 25%.
CLV and CAC
Knowledge of CLV combined with customer acquisition costs is vital if you want to succeed on Amazon. Balancing CLV and CAC will ensure that your campaigns are both profitable and optimized for your business.
The CLV to CAC Ratio is an important metric to track the relationship between the cost of acquiring a customer and their lifetime value (LTV). This can be represented in a basic graphic.
The ratio also gives you another way to look at your advertising. If your promotions and marketing tactics have only focused on gaining new customers, it's time to consider CLV and put a little more focus on your existing customers.
How to calculate CLV
To make the most of CLV, you need to analyze the transaction history and work out the behavioral patterns of a customer or similar customers. You can then work out the customer lifespan and the margin they will generate for your business. Sounds difficult? Not if you use the right tools. However, a more straightforward method can give you some indication of CLV as a starting point.
Here is a simple formula to calculate customer lifetime value:
CLV = Total order value x Average gross margin x Retention period
Each input acts as a lever you can pull to grow your CLV. However, every move using a simple CLV could have unintended consequences. For example, a price increase may improve your average order value, but it could push customers to purchase less often or look for lower-cost alternatives. It would be best if you were to look for something more sophisticated than that.
Going beyond a rough overview of CLV and diving into individual and product-level analysis presents a considerable challenge. Ultimately, this is not a task that can be done by hand (especially if you want to keep the information up to date), and it's not information currently provided in Amazon Seller Central.
The Complete CLV approach calculates customer lifetime value on a year-by-year and month-by-month basis. You can factor in changing revenues and costs models and compare the projected ROI of different investment possibilities to calculate present value.
Fundamentally, the big difference here is looking at CLV without any approximations, estimating, or forecasting. It's a bottom-up approach that looks at each customer, what they've bought, and when they bought it — along with the profit generated by each ASIN.
How do we calculate CLV at Nozzle?
The above explanation basically covers how we at Nozzle go about calculating CLV. We go through the entire purchasing history per customer and then take the median. We then show this over the relevant period — for example, how much is a customer worth after 3/6/12/24 months?
Here’s a visual example of how Nozzle approaches CLV calculation.
And here’s an example of how Nozzle looks at the average lifetime value of customers across 24 months.
We then use ‘cohort analysis’ to break apart data sets into related groups for analysis. This is critical for the interpretation of CLV data.
For example, we can compare people who first converted in Q1 of 2020 with people who first converted in Q1 of 2021 and how they compare in their respective first and second quarters — adding more certainty to the data.
We do this by tapping into numerous Amazon APIs and extracting data from Amazon MWS. We then crunch the numbers using our proprietary AI algorithms and present the figures back in customizable dashboards.
Suggested reading: If you want even more detail on how we calculate CLV, check out our explainer article: How Does Nozzle Calculate CLV?
Using CLV to transform your Amazon strategy
While we have already shown how CLV can play a part in many Amazon marketplace activities, it has a special place in strategizing how you can grow your business.
There are many strategies you can follow as an Amazon Seller. Here, we will walk through some of the common approaches, what they achieve, and how to perform them.
To grow your profit, you need to retain customers and grow your customer base. Fundamentally, there are two ways of doing this:
- Acquire new customers
Spending the right amount can gain the customers who are most valuable to you. You can then review your product portfolio to target these best spenders. You can also recognize how dependent you are on existing customers and tailor new marketing strategies and campaigns accordingly.
- Retain existing high-value customers
Customer retention is, on average, cheaper than acquisition. By retaining customers — and growing CLV — you can spend more on customer acquisition (CAC) and still turn a profit long term.
When you know your customer, and what products they are after, you can focus your ad resources and products on these factors rather than expecting results by chasing everyone and everything.
A focus on customer retention can lead to strategic goals such as:
- Reducing churn rate of important customers with targeted offers and promotions
- Selective churn by losing fewer valuable customers to focus on more profitable ones
- Incentivizing customer loyalty
- Improving weak operational points
Optimizing bid strategy
Customer Lifetime Value effectively comes down to 'buying patterns.’ You are predicting what customers will buy next and the likelihood of a repeat purchase. When it comes to selling on Amazon, once you've established significant momentum, your business's sales trajectory is like a flywheel. You can use CLV to keep that flywheel turning faster.
Sales velocity has real power in Amazon's marketplace and, once you've established it, you want to do everything possible to keep accelerating.
CLV tends to lead to marketing that focuses on your customer and lends itself to a “full-funnel” approach. It encourages better use of Amazon ad resources.
CLV also gives you the ability to spend more on focused strategies. With a grasp on product-specific CLV, you get a picture of which products are the most valuable over the long term and especially why. These can be products that:
- Lead to repeat purchases of that single product or lead to more organic sales over time.
- Act as gateway products that lead customers (on average) to purchase a broader range of products from your portfolio — either over the short or long term.
To increase CLV, you can run unique campaigns tied to a particular season or event and consider temporarily reducing the price of your best-selling items. You can look at special promotions to reward frequent buyers by providing a digital coupon, giving a percentage off, or free shipping.
Winning PPC placements for these products will also help grow organic traffic for these listings because of the positive effect that high-converting PPC placements have on organic rankings.
If you're FBA approved, you can also add a Subscribe & Save option to your products to attract Prime members. This will guarantee repeat purchases.
CLV tools can break down how customer segments contribute to your total revenue. Traditional approaches to segmentation focused mainly on demographics such as gender or age. But it isn’t enough anymore just to understand who your customer is. By looking at personas across product categories, you can put more effort into specific aspects of your marketing.
Cross-selling and upselling are related because they focus on providing value to customers rather than limiting them to products they have already considered or purchased.
The key to success in both is to use CLV to understand what your customers value most and then respond with bundles, hyper-targeted ads, or individual products that meet those needs at the right time.
Optimized product bundling
Bundles can help drive up CLV. They improve average order value (AOV). You can also attach high CLV products to bundles — helping encourage repeat purchases and purchase frequency.
As we've mentioned, CLV calculations also help you design profitable bundles by bundling products that customers often end up buying together anyway.
Suggested reading: Guess what — we have a guide on bundling too: Amazon Product Bundling Strategy Ready for 2021 - Nozzle Insights
Understanding trends and profitability
Calculating CLV makes you think not just about a sale, but about the entire customer journey: where, when, how often, and for how much do your customers buy your products.
By analyzing buyer behavior, you begin to understand the interval between repeat purchases. This helps you time remarketing campaigns. Sponsored Brand ads provide unique retargeting features akin to programmatic advertising. These can be used within your broader CLV strategy — helping target potential customers based on their search history or having viewed or purchased your products.
Target the right customers at the right time
CLV is one of the most valuable pieces of data to have on your customers and will allow you to make quick refinements and scale your profits accordingly. However, CLV isn't a magic bullet. You need good analytics tools and a solid focus to squeeze out real value from CLV.
To benefit, you will need:
- The right type of product and a solid brand to ensure repeat purchases.
- A reasonable CLV timeline — say three months. Remember, your business could die before realizing your CLV, so pick the products to match the timeline and vice versa.
- CLV growth tools — which are not found on Amazon.
- Less focus on the CAC side of the equation — because Amazon does provide tools to measure this, it can get more attention.
Accurately calculating CLV is one thing — you still need the expertise to use the information effectively once it's been calculated. Our self-service analytics platform is built to help Sellers master Amazon customer data and use it to drive the best commercial outcomes.
It would help if you considered other retail analytics tools such as:
- Sales analysis
- Market basket analysis
- Geo-hotspot analysis
Over time, Amazon advertising is moving away from single product sales to more of a focus on customer personas, and demographics. We believe such changes will make Nozzle CLV analysis even more central to your retail, portfolio, and advertising strategies.
Success isn't about finding customers — it's about finding the right customers at the right time. Now that you can calculate the lifetime value of your current customer base, you'll be able to start crafting campaigns that target and win over those customers that really make a difference to your bottom line.
One of the best ways to calculate your CLV — both efficiently and consistently — is with a tool. Nozzle offers customer lifetime value analysis (amongst many other features) to help you optimize your Amazon sales. So if you want catered insight to transform your Amazon operation, sign up for our free 14 day trial to get a feel for how we work.