Wix eCommerce | The Math and Art of Optimizing Customer Lifetime Value

Hi, my name is Liat and I lead e commerce marketing at wix. Today we'll be talking about the math and art of optimizing customer lifetime value. Before we get started, I'll share a few words about WIX E Commerce. For those of you who aren't familiar with our platform, today we have over 700,000 active e commerce stores worldwide. 2020 was a year that changed the way people shop and sell online. Quick causing massive growth in E commerce. Our merchants transacted over $5.4 billion online. We saw 140% year over year growth in sales transactions and 114% year over year growth in their sales revenue. WIX offers a complete e commerce platform. You can sell online and manage your business including your product, catalog, inventory and sales. From a single dashboard. You can connect payment providers including WIX Payments, our own payment provider. Integrate all of your sales channels from Facebook shop to Amazon, Ebay and more. We offer native analytics for all traffic, sales and customer data, shipping and fulfillment solutions. And our own native CRM platform which includes email marketing, live chat, invoices, business automations and more. If you have a brick and mortar, you can streamline online and offline sales with wix Point. Now, without any further ado, we'll get into what we're here to talk about today. We'll start with the math, how you actually calculate customer lifetime value. And move on to the art of how you optimize and increase that customer lifetime value. So what exactly is customer lifetime value? In E commerce you measure so many metrics and KPIs your visitors bounce rates, click through rates, conversion rates, average order value, add to cart ratio. These are all really important KPIs, but they focus on short term goals. At the end of the day, your customers are your greatest asset. You invest so much in acquiring every customer, your budget, your time, your resources. And the real reward is not just closing that sale. Although in E commerce I will say that every sale is a milestone and a celebration. But ultimately the real reward is the potential to continue earning from that customer for a lifetime. And that brings us to customer lifetime value, which most simply put is the total estimated revenue that you'll earn from a customer or customer segment over a specific amount of time, their lifetime. As a customer, why does lifetime value actually matter? Well, by focusing on returning customers and and their lifetime value, you're providing your business with a North Star for growing profits. Ultimately, increasing lifetime value will increase profits. You get an accurate gauge on what a customer is actually worth and that enables you to structure your marketing investment to maximize your profit margin. And it can help you down to the granular level of determining your max bid for paid ad platforms like Google and Facebook. So let's talk about the math. How do you calculate customer lifetime value? Well, I want to point out that there are multiple methods for doing the calculations of customer lifetime value. I'll touch on a couple of them today. Ultimately, you're going to have to do the homework and figure out what works for you and your business. Let's start with the first method, the most basic. And in this method, we're going to say that lifetime value is equal to your average order value multiplied by order frequency multiplied by customer lifespan. So let's just break down those metrics for a second. Average order value is the average amount customers spend per transaction. Order frequency is the average number of orders customers make per year, and customer lifespan is the average number of years a customer remains an active shopper. I do want to point out a little small note here, and that is identifying customers by cookies might be less accurate and sensitive than identifying customers via a login mechanism. So take that into account when you're calculating your lifetime value. So let's put this method to practice. We'll start with a little example. Let's say you're an online store and you sell scented candles that cost around $20 each and monthly candle subscriptions that cost $15 per month. And we're going to look at a customer lifespan of two years. And in those two years, basic tier customers buy an average of three candles a year. And premium tier customers buy an average of 2 candles plus a monthly subscription for 12 months. So in this case, we would calculate lifetime value for each of those customer segments. Individually, our basic tier is pretty straightforward. We're going to say $20 multiplied by three candles multiplied by two years, giving us $120. And if we're looking at the premium tier, we're going to say $15 of subscriptions multiplied by 12 months plus $20 multiplied by two candles, and that's going to give us a total of $220. So two customer segments with two customer lifetime values. At this point, you're probably saying to me, well, there are some things you're not taking into account here, because my customer might be spending that money, but that's not what I'm actually earning because I have fulfillment costs, plus I don't retain all of my customers. To which I would say you're absolutely right. So let's move on to method two, which does Account for those variables. So here we're going to add in two more metrics. We're going to add in the order cost, so direct expenses for orders fulfilled. And we're also going to add in our customer retention rate, so the average rate of customers retained over that specific period of time. So let's carry on with our same example, but just adjust it to fit with this method. So here we're going to say for our basic tier of customer, that lifetime value would be equal to the $20, minus the cost of the $12, giving us eight times three candles times two years. And now we're going to divide by one minus the retention rate, which is essentially your churn. So one minus that 52%. And that's going to end us with $100 customer lifetime value. And we'll do the same calculation for our premium tier customers, again adjusting for the order costs. So we're going to say $20 minus the 12, multiplied by the 2 candles, $15 of subscriptions minus the 12 of the fulfillment times 12 months divided by the churn, and we have $108.33. So now that we've calculated our lifetime values, we can start to think about our return on investment ratio. So return on investment really just means how much you're earning on every customer you're acquiring. And in order to calculate it, we need to take a look at our customer acquisition cost, which is exactly that, how much it costs you to acquire a customer. So your return on investment ratio is lifetime value divided by your customer acquisition costs. So in our first method, the basic method we looked at, we had two lifetime values. Basic tier 120, premium tier 260. Let's account now for our customer acquisition costs. So let's say that we spent $20,000 to acquire 800 customers. That means we had an average customer acquisition cost of $25. So basic TRROI would be 4.8x and premium tier ROI would be 8.8x. We could do the same calculation if we used method two to calculate our lifetime value. So if you remember here, we had basic tier $100, premium tier $108.33. And again, calculating the ROI is going to give us 4x for basic tier, 4.3x for the premium tier. So what's really important to note here is that customer acquisition costs are often going to be higher than your first purchase revenues. So think about that example that we just looked at of the candle store. So our candles cost $20, subscriptions cost $15, and we said we were spending $25 to acquire a customer. So if you didn't know your lifetime value of a customer and understand that you're only going to start making money from the second or third purchase of that customer, you might decide to drop a really great customer lead source and not invest in certain customer acquisition, even though they would be bringing you really valuable customers over time. This also emphasizes though, the business case and importance of having a great customer retention system in place. Because if you are going to invest in acquiring those customers, you have to make sure that we're getting them to second and third purchase. So here I want to talk about some of the challenges of the lifetime value and ROI model. So number one, customer acquisition costs and conversion rates change with time and aren't constant. Retention rates or churn rates change with time and aren't constant. So when you're looking at a long term lifetime value, on one hand you're getting a really accurate view of what a customer is worth to you. But on the flip side, it's really hard to use that information to make tactical decisions about how you're going to invest your marketing resources and budget. So I can say even at WIX ourselves, we do not use lifetime value. When we look at how we're going to invest and optimize our marketing budget, we use a different methodology that's called troi, which means time to return on investment. So We're a freemium SaaS company with 200 million users worldwide. So we have a really different kind of business. And that's a different talk for a different day. But what I do want to focus on here is that you need to constantly bear in mind short term versus long term. And the customer value will be the cornerstone of both of those. So in the short term, what we care about is bringing relevant shoppers when we're acquiring customers, being able to cover our acquisition costs and return our marketing investment as quickly as possible so that we can go and reinvest that money and bring more customers. But in the long term, what we care about is growing customer value growing and their revenue so that we're building the business and optimizing and increasing profitability over time. So this brings me to the next part of the math which is going to be cohort based customer value and roi. And this is going to help us focus on those short term challenges. So for customer value calculations to actually be actionable, you need to know how quickly you're going to obtain that value over a certain period of time. So we're going to Create cohorts based on purchase frequency or the repurchase rate. So a cohort is essentially a group of customers that join during the same period of time. So we could take 30 days, 60 days, even 120 days. Essentially we just need enough time to get the customer to that second purchase. And by looking at these shorter time frame cohorts for customer value, we're going to be able to actually optimize our acquisition budget and spend. Because we'll know when and which products customers are purchasing and how much they're actually worth to the brand. We'll be able to plan our post purchase marketing campaigns based on that lag time between purchases. So we'll know when our customer is making their second and third purchases. And we're going to have a baseline metric that we can use to measure whether our post purchase marketing activities are actually working. So thinking about how we're cutting down on that time between our first and second purchases. So let's go back to our example, but this time we're going to focus in on the customer's first 120 days. So we're still an online store selling candles for $20 and subscriptions for $15. But now we're saying that in those first 120 days, basic tier customers buy an average of 22 candles and premium tier customers buy an average of 2 candles plus begin their monthly subscription purchasing that first month of the subscription. So we'd have a basic tier customer value of $40 and a premium tier customer value of $55. And then if we wanted to calculate the ROI of this using those same acquisition costs that we spoke about of $25, we're going to end up with an ROI ratio of 1.66x for the basic tier and 2.2x for the premium tier, which is obviously much lower than the first ratio we were looking at when we were looking at lifetime value. Over the long term, the same would be true if we calculate using the second method. We just need to adjust for that churn rate and the cost of the orders. So do the calculations again. And now if we look at ROI here, we're seeing that we have 1.3x and 1.6x for the two segments respectively. So once we're doing cohort based customer value and understanding that shorter time frame roi, we're able to work on, first of all, our customer acquisition. We can optimize our acquisition strategy, our audience targeting, and focus on reducing our customer acquisition costs so that we're able to optimize that roi ratio. And we're, and we're also able to think about customer value, how we're going to increase average orders in the buyer journey by offering value driven sales offers, which we'll talk about a little bit later in the session. And we can also think about how we continue to increase order frequency using strong inbound and retention strategies. So that's going to bring us directly to the art of increasing customer lifetime value. So, so when we're trying to increase our lifetime value, there are going to be many areas we want to impact. We might want to increase the average order value, we might want to drive repeat sales, we might want to build customer relations, but ultimately what we're focusing on is providing value throughout the customer journey. If we're going to be pushing things to customers that they don't need or want, we're going to end up annoying them and driving them away. So everything that we do to try and optimize those sales and get customers to buy more has to drill down into actually providing them value. So we'll start with the first and most important step, which is know your shoppers. We won't be able to do anything if we don't really understand who our customer base is. So think about why customers chose to buy certain products from your store. What's the product that they're buying? What does it say about them, their needs, what are their demographics? And then what are the shopping patterns of buyers of a similar makeup? Go into your data and analyze the past buyer metrics of previous customers. It's going to help you understand the true motivation behind the purchase. And then you can start to think strategically about about those buyer Personas or customer groups so you can create compelling offers that speak to their specific needs and wants. So once you've done that, you're ready to start implementing sales strategies. The first two that I want to talk about are upsell and cross sell. They're similar in that they both aim to get customers to spend more, but they work really differently. And I find that people sometimes confuse them. So, so let's clarify. Upsell is when you encourage customers to buy a comparable, superior, more expensive product than the one they're actually considering. So let's say you want to buy a burger and then the salesperson convinces you to take the deluxe superior burger that costs 20% more. In a cross sale situation, you're trying to encourage customers to buy related or complementary products in addition to what they're already buying. So again, think about that burger. In this case, the salesperson convinces you to take a side of fries along with that burger. So there are lots of different ways you can implement a cross sell and upsell. We'll look at some examples. One of the most popular ways in e commerce is by displaying related items on the product page. At wix, we see that stores who display related items on their product pages and get an average of 43% more sales transactions. So that just goes to show you how effective a cross sell upsell strategy can be. Let's look at some examples and understand how this would work. So this is a website called Forge2Table. They sell handcrafted Japanese chef's knives. And here we're looking at one of their knives product page. And you can see down the bottom there that they've added related items. And in those related items, they're suggesting additional products that you might want to buy along with this knife. So this is a great example of cross sell. And here they're showing us during the browsing stage of the buyer journey, the consideration stage, when we're in the product page. So this would also be a great place to do an upsell. Instead of showing those related items of additional items that you want to buy, they could show other knives that are more expensive and that the customer might prefer instead of this knife. So that would be an example of upsell. You can continue your cross sell strategy all the way through checkout. So here's an example of another WIC store. This one is called Cullen Canary. They sell luxury candles. You may have noticed that I have a thing for candles. And in this case, what they're doing in the checkout process is after I've selected the candle that I want to buy and I've gone to the cart, they're asking me with that little checkbox down the bottom if this is a gift. And if I select the checkbox, I can very quickly add in a gift card for an additional $5, type in the message right here and continue with the checkout process. So what, what they're doing is they're getting me to buy an additional product along with the candle. It's providing me great value because I did want to give that gift, that candle as a gift. So now the gift card is included, I don't need to worry about that on top and they haven't disturbed the buying process. If, for example, they had tried to do an upsell here, we would be in a totally different scenario. So imagine that I'd chosen my candle and then when I got to cart, they tried to show me a different More expensive candle. That's probably not a great idea because you're creating friction for your customer. You're confusing them at that very critical moment of them closing the purchase. So upsell is not recommended to do within the checkout process versus a cross sell. That is, you could also choose to sell product bundles. So bundling is like the offspring of cross sell and upsell. Essentially you're taking a main product and bundling it with related products and selling all of those items for a discount. So if I was buying each product individually, it would cost me more, but if I was just buying the single product would cost me less. So that's where the combo of cross sell upsell comes in. You can do pure bundling, where you only let people buy bundles and you don't sell individual products. Or you could do mixed bundling where you make both options available and shoppers can buy either the individual product or the bundle. So here are a couple of examples. This store here is called Rubylove. They sell period swimwear and underwear. I'm looking at two of the product bundles that they offer. The first is called the period kit. It's aimed at young girls having their first period. And you can see how they've really done their customer research and understood the customer need and at that critical milestone. And they're offering a great value product here that really fits the customer needs. Another type of bundle that they're offering is that mixed swimwear bundle. And that's also really smart because they're noticing that customers tend to buy those products together, so they're selling them in a bundle for a better price. So two different ways of doing product bundling in the same store. Another interesting way of doing product bundles we can see here in that coal and canary candle store. So they offer a three candle bundle, but they allow you to choose which candles you want to include in the bundle. So you're able to customize your bundle and get the very specific candles that you want for that better price. One of the most effective ways of increasing customer lifetime value is by selling product subscriptions. Because you're developing a recurring payment model. You get customers to pay more, stay for longer, they become highly valuable and, and you're producing a steady stream of income that lasts longer. So you could offer individual recurring products. You could do one of products that also have a subscription option, and you could create curated themed subscription boxes. So there are a lot of ways to offer subscriptions. Here's a nice example. This store sells fresh fruits, vegetables and juices. They're called the Ginger Planet. And here we're taking a look at their fruit box. So this is a product that they offer as a single purchase or as a weekly subscription. So that's a really smart way to let customers increase their frequency over time. You can also sell gift cards. Gift cards are a really great way to improve cash flow and generate immediate revenue because you get that revenue whether they're used or not. Your you're promoting brand awareness because people often give them as gifts. So you're reaching new customers and they tend to generate larger purchases because customers usually spend more than the gift card value. They're great for holiday sales because people can keep shopping up until the last minute and they're easy to manage and distribute because there is no fulfillment needed. So based on data from the gifted app in the WIX app market, on average customers spend 38% more than a gift card value. So that's a huge increase. Here's a nice example of a company that's selling digital gift cards on their website called Elle Johnson. They do amazing skin care products and they actually allow you to choose a custom amount for your gift card when you purchase the gift card. One of my favorite features to talk about is live chat. I don't think that I ever talk about e commerce without such a somehow coming back to live chat. But especially in the context of connecting with shoppers and lifetime value, it's especially valuable. It allows you to connect with them in real time at key stages of their shopping journey. So do the parallel to an offline setting because in e commerce customers so often don't get to interact with your products or you or your business. If you had a brick and mortar store and a customer walked in the door, you'd walk up to them and say hey, how are you? How can I help you today? You might walk around the store together and look at products together. And in an e commerce setting, your website needs to do that work for you. And live chat is a great way for you to get that direct engagement with customers. By chatting with them, you're able to identify windows of opportunity where you can cross sell and upsell. And and if we're talking about e commerce, you have the added value of being able to view past customers purchase history so you can look at the data and make recommendations based on their preferences. The one thing to be super careful here, and it's always true for an upsell or cross sell, is be sensitive to customers needs and make sure that promotions are value driven and that you're not just being A pushy salesperson. So WIX stores that offer live chat get 8 to 12 times higher revenues. And those that are actively recommending products via the Chat actually generate 71% more sales. Of course you can send email offers. With email your brand is always front and center in customer mind. Make sure you're creating segmented customer lists so that you're giving them really targeted specific offers based on their preferences and purchase history. And make sure that you're constantly testing open rates, CTRs, frequency, everything to make sure that those emails are working best for your customers and your business. So here's a great example of some cross sell emails created by forge2table that same website we saw before selling the Japanese chef knives. So what they've done here is create two separate emails for two different customer segments and they're actually highlighting very different products based on their knowledge of customer history and preference. Make sure that you're setting up your business automations. So basically these are rule based automations that help you re engage shoppers and also encourage them to purchase. So I think the most well known automation is abandoned cart recovery. Those reminders you're sending to customers if they abandon carts so that they're making sure that they're following up on the purchase. But you can set up automations for new members and subscribers offering them some kind of benefit or offer. You can send out offers certain number of days after our last purchase. If we're going back to that frequency rate or if you have a product that runs out, make sure that you're reminding customers to get the next one at the right time. So WIX stores with active abandoned cart recovery automations increase sales by up to 29%. That's a huge difference. Here's a really great example from Colin Canary, our candle store of a different automation that they're using for new members. So every new member that joins their online store gets a thank you email offering them a coupon for subscribing. And you can see that this email alone has driven over $45,000 in sales. So that's an amazing job by one small email. And finally offer loyalty programs. In the long run you want to motivate customers to keep engaging with your brand and it's a great way to incentivize them and nurture relationships. Make sure that you're flexible and allowing customers to choose rewards that they like and that makes sense for them. And discounts are not enough. You really want to aim to create an emotional connection there with your shoppers. So based on data that we have from the Smileio app. In the WIX app market, we know that loyal customers spend five times more than average customers. So going back to that lifetime value and continuing to invest in customers and optimize that value. So I'll end the session basically the same way that I started and remind you that at the end of the day, our customers are our greatest asset, and we want to keep in mind always that potential to continue earning from them for a lifetime and make sure that everything that we're doing is tapping back into how we provide value and optimize for that. So thank you very much. I'm happy to connect with you. You can find the WIX team in our Facebook group or hit me up on Twitter.