How to Master LTV on Amazon
Loyal customers are the holy grail for Amazon Sellers. While some repeat orders happen by chance, building long-term customer relationships takes effort, time, and investment. So Sellers need to optimise their advertising strategies if they want to see profitable growth.
But this isn’t always easy — and it can be expensive. Advertising cost on Amazon is up 50% year-over-year.¹ We all know that it’s a fool’s game to set up Amazon ads without a solid strategy — and the cornerstone of any good advertising strategy is data. This is where understanding your customer’s Lifetime Value (LTV) becomes vital.
LTV, also commonly referred to as Customer Lifetime Value (CLV), is essentially the total profit each customer contributes to your business across the whole of your relationship with them. LTV is used to forecast customer purchasing patterns, so you get a reliable idea of what your customers will buy next and when.
With LTV metrics at your disposal, you gain a deeper understanding of how valuable a customer is to your business. You can then adjust your ad strategy accordingly, making insightful decisions that reduce Customer Acquisition Costs (CAC) and build long-standing, fruitful customer relationships. LTV is the secret sauce that Sellers must use to overtake competition and boost their profit margins. After all, it’s much less expensive to retain a happy customer than it is to attract a new one.
In fact, the power of LTV is exactly why we built Nozzle. While Amazon has a wealth of analytics tools, CLV is the missing piece of the puzzle. So, we created our tool to help Sellers unlock the power of CLV and foster long-term customer relationships that blossom year on year.
Suggested reading: To find out more about the importance of customer analytics to seeing Seller success, check out our eBook — You Don’t Understand Your Amazon Customers and It’s Costing You!
Calculating LTV is hard… but it doesn’t have to be
For all the benefits of LTV, this metric often eludes Sellers. Like any mathematical equation, it can be a bit difficult to get one’s head around without the right expertise and knowledge.
Broadly speaking, there are two ways to calculate CLV: Simple and Complete.
Simple LTV gives you a ballpark metric, using historical data to predict customer buying patterns for the future. To calculate simple LTV, you’ll look at the net value of each transaction for a customer and then multiply this by your average gross margin. We want to emphasise that simple LTV really is a ballpark figure. While it’s better than nothing, the static nature of this calculation means that the figure will only ever be a rough estimate.
In the world of digital ads, rough estimates don’t cut it. Luckily, there’s a better, more accurate way to calculate LTV…
By contrast, complete LTV is calculated year-by-year or month-by-month. The data you use is much more granular, dynamic, and relevant. You can factor in circumstances like changing revenues and costs, as well as consider different investment possibilities and ROI to calculate a customer’s value. Complete LTV powers our tool.
If you want to calculate complete LTV on your own, here’s a step-by-step walkthrough.
Step 1. Determine your revenue for each customer — either on a month-by-month or year-by-year basis.
Step 2. Deduct costs like tax, Amazon merchant fees, advertising spend, and the cost of supply chain processes.
An optional third step is to create cohorts of your customers, based on when they first bought from you. For example, you can have a “Jan ‘22” cohort that’s made up of customers that first bought a product of yours in January 2022. Whenever any of them buy a product from you again in a later month, that profit will be factored into the Jan ‘22 cohort so that you can accurately tell how well said cohort is performing over time.
While these three steps make calculating complete LTV look simple enough, you’ll run into some roadblocks along the way. Primarily when sourcing this data from Amazon, which can feel like trying to find a needle in a haystack.
Though Amazon can provide helpful insights into customer and product data to help inform calculating LTV, an analytics tool is key to helping you figure out how best to use LTV to inform your strategies
Plus, in the world of Amazon advertising, speed is the name of the game. You need data insights at pace and at scale. This is critical to building a dynamic ad strategy that brings you great ROI in the short and long term.
Not to toot our own horn, but that’s exactly why we created our tool, Nozzle. As Amazon experts, we saw a huge opportunity to help Sellers get more out of Amazon data. Our tool taps into Amazon’s APIs (both MWS and the new Selling Partners) to uncover your LTV metrics, which are then presented back to you in a customizable, intuitive dashboard.
Putting LTV to use
The core value of LTV is the insight it gives you into how profitable a customer is and, therefore, how much it would cost to acquire new customers — better informing you on how to best adjust your ad strategy.
But this kind of valuable insight can only come from using an analytics tool that can tell you what customers will buy next and/or will buy along with another product. Nozzle, for example, provides this information in the form of a dashboard. These predictions around LTV can also sharpen your Amazon product bundling tactics, enabling you to boost your Average Order Value (AOV).
As you build up your customer base through LTV, you can then invest more on acquiring new customers. For example, you can boost your PPC spending and still turn a profit in the long-term.
Pro tip: Check out our explainer What Makes a Good Amazon PPC Management Service? for more information on what goes into truly effective PPC management.
This is because LTV projection gives you the ability to look at the holistic, long-term picture when calculating your breakeven ACoS (Advertising Cost of Sale), providing you with granular data about how much you can spend on ads without eroding the bottom line.
It really is a well-thought-out way to supercharge your Amazon advertising strategy. Plus, with the right analytics tool at your disposal for LTV, you can uncover amazing insights about how your customers relate to your products. For example, a good tool will help you understand which products tend to generate repeat orders.
Armed with insights like this, you can tailor your ad strategy, making insight-led decisions about your ad spend and target RoAS. With your LTV metrics in motion, you’ll be able to strike the delicate balance between retaining loyal customers and winning new ones at speed and scale.
Mastering Amazon metrics begins with the right tool
When it comes to rising above the crowded Amazon marketplace, data and insights are critical differentiators that will help you stay ahead of the competition and increase your profits. But LTV remains to be an underutilized metric that many Sellers don’t know about.
If you want to take your Amazon strategy to the next level, then getting started with LTV is your best bet. But don’t go at it alone. Enrich your business with LTV by using a dedicated, specialist tool.
At Nozzle, providing visibility over valuable data to Sellers is our bread and butter. We harness the power of AI and analytics to simplify and streamline LTV calculations, presenting them to you in an intuitive dashboard that is rich with insights ready for you to mobilise. Sign up for a free 14 day trial today to find out more about how our insights can help you achieve the Amazon success you deserve.