If you want a sure way of increasing profits you should start looking inside your business. Shifting your sales focus from attracting new customers to enticing your proven customers to buy again is one way to increase your sales dramatically.
I’m not saying you should stop looking for new customers—not at all. However, it makes sense that your ideal prospect is one that has already converted – in other words, one of your current customers. We can also say with good certainty that the cost to generate a sale from acquiring new customers is higher than the cost of generating a sale from current customers.
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, you put more revenue in 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 in a company.
The 80/20 Rule
The 80/20 Rule has foundations in economics and states that roughly 80 percent of your outcomes come from 20 percent of your inputs. Or in other words, 20 percent of your current customers account for 80 percent of your revenues.
Although the rule was proven using statistical analysis by a man named Pareto, they are not hard rules set in concrete and not every company will be like this. The ratio won’t be exactly 80/20, but chances are if you look at it 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% of income in Italy was received by 20% 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 whom that 20 percent is and make it a point to get them to buy again from you. 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.” What you do when you keep customers happy is 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 are your customer.
It is important to know your customers’ lifetime value so that you can 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 your customers’ lifetime value is $400 and it cost you $50 to acquire that customer then that customer is considered to be profitable ($400 LTV – $50 CPA = $350 Profit) and obtaining similar customers would be wise.
Taking that example one step further, if your average customer purchased a product worth $40 ten times from you then their lifetime value would be $400. If it cost you $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.
Here are 3 ways you can increase your customer lifetime value.
- Personalize the customer relationship & build rapport.
- Make yourself available and answer their questions.
- Deliver a monthly email follow-up to improve communication and retention.
In Summary
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 every need. 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.