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Oct 1, 2009
by Eric Leuenberger
Why? Because you have already spent the initial investment to gain your current customer, and if retained properly, your investment to sell to them again should be far less. In other words, more revenue goes into your pocket from the sale to a current customer, because the expense to persuade them to buy is less than the investment needed to win a new customer. This is how you build profit.
The 80/20 Rule
The 80/20 Rule has foundations in economics and states that roughly 80 percent of your outcomes result from 20 percent of your input. Thus, 20 percent of your current customers account for 80 percent of your revenues. Although the rule was proven using statistical analysis, not every company will be like this. The ratio won't be exactly 80/20, but chances are if you look closely, you'll find striking similarities in your findings.
Wikipedia says this about the 80/20 rule:
"The principle was suggested by management thinker, Joseph M. Juran. It was named after the Italian economist, Vilfredo Pareto, who observed that 80 percent of income in Italy was received by 20 percent of the Italian population. The assumption is that most of the results in any situation are determined by a small number of causes."
What does this mean for your business? Well, if it is true that 80 percent of your revenues come from 20 percent of your customers, then it would be wise to invest in finding out who that 20 percent is, and make it a point to get them to buy from you again. Your bottom line should see a nice bump each time these current customers repeat purchase, and the cost to get them to do so will be next to nothing.
This brings me to my final point. Each customer holds a value to your company beyond the initial sale. Jim Rohn once said, "One good customer well taken care of could be more valuable than $10,000 worth of advertising." When you keep customers happy, you build what is called "Lifetime Value," and knowing what it means to your business is critical to building profits.
Customer Lifetime Value
The lifetime value (LTV) of a customer can be defined as the total amount an average customer will spend with your store over the period of time that they remain your customer. It is important to know your customers' lifetime value in order to make informed decisions about your marketing costs, budget and customer acquisition strategies.
Wikipedia defines customer lifetime value as:
"In marketing, customer lifetime value (CLV), lifetime customer value (LCV), or lifetime value (LTV) and a new concept of "customer life cycle management," is the present value of the future cash flows attributed to the customer relationship. Use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long term customer satisfaction, rather than on maximizing short term sales."
For example, if a customer's lifetime value is $400 and it cost $50 to acquire that customer, then that customer is considered to be profitable ($400 LTV - $50 CPA = $350 Profit) and trying to obtain similar customers would be wise. Taking that example one step further, if your average customer purchased a product worth $40 ten times, then their lifetime value would be $400. If it cost $50 to acquire this customer, then the customer is still considered to be profitable, even though you spent more to acquire them than the average revenue generated from one sale ($400 LTV - $50 CPA = $350 Profit). You build lifetime value by nurturing your current customer base, listening to their needs, and delivering high quality customer service, among other things.
3 ways to increase your customer lifetime value.
Building a successful ecommerce business, or any business for that matter, requires the ability to retain customers and foster loyalty. Profitability in ecommerce is found through customer loyalty. The 80/20 rule holds that 20 percent of your current customers provide 80 percent of your business. You need to find out who those 20 percent are and cater to their needs. Lifetime value increases by developing a retention program that nurtures the relationship between you and your customer. Paying careful attention to these elements will help you build a more profitable and sustainable ecommerce business.
Eric Leuenberger is an ecommerce conversion marketing expert and author of a leading Ecommerce Optimization blog (www.zencartoptimization.com). He coaches ecommerce store owners on how to increase their website sales through skillfully crafted online paid search advertising, targeted marketing strategies and website sales strategies. He can be contacted at 1-866-602-2673.
Topic: Business Strategies
Related Articles: ecommerce
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