How to Double Your E-Commerce Sales Using ‘Reverse’ Optimization Strategy
Table of contents:
- Understanding the Relationship Between CAC and LTV
- Calculating LTV
- Parting Thoughts
Innovation is a central part of the digital marketing world, so it’s no surprise that businesses large and small are constantly looking for the latest tricks and trends that will help them find new traffic sources and gain new customers. I’ve found this to be especially true of Shopify retailers, who can sometimes struggle to break out in crowded market niches.
This is all great in theory. The problem, however, is that this causes most marketers to focus on gimmicks, rather than the essential business practices that serve as the foundation for success. Yes, optimizing your Facebook ads and fine-tuning your SEO campaigns can help you improve results for your store. But this isn’t where the secret to explosive growth lies.
In reality, the best way to double your e-commerce sales is to focus on a refined and proven business model that both successful small businesses and huge corporations have used for decades. I’m not talking about some unheard-of secret — nope, I’m referring to a basic formula that incorporates two of the most important business-related stats in the world: CAC (cost to acquire a customer) and customer LTV (lifetime value). This focus is how I’ve achieved incredible success for my clients. It’s never been my goal to create flashy campaigns with clever slogans that win awards and industry accolades. Instead, by using a reverse optimization strategy that brings in high-value repeat customers, I’ve been able to generate massive e-commerce growth for my clients. Every Facebook marketing campaign I’ve directed has had this goal in mind. As a result, I’ve been able to achieve results like bringing in over 3,000 new patient leads each month for Aspen Dental. I helped Learn to Trade decrease their cost per lead by over 50% so they could generate $11 in revenue for every dollar spent on Facebook advertising. These results all tie back to the same formula: working to increase customer LTV while simultaneously lowering the CAC. It’s worked for these and countless other companies. Whether you’ve just launched your Shopify store or you’re looking for ways to increase your profitability, focusing on CAC and LTV to optimize your e-commerce funnel will ultimately be your best recipe for success. In this guide, I’ll help you better understand these crucial digital marketing measurements, as well as how you can “reverse optimize” to get better results from your e-commerce store.
Understanding the Relationship Between CAC and LTV
Before we dive into optimizing your LTV profit and CAC, it is essential that you fully understand what these terms mean and how they are calculated. As Kissmetrics explains, “the CAC can be calculated by simply dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent. For example, if a company spent $100 on marketing in a year and acquired 100 customers in the same year, their CAC is $1.00.” While this formula is most commonly used to evaluate total marketing expenses, CAC can also be beneficial in determining which marketing channels are delivering the greatest return on investment. Both Facebook and PPC ads (as well as Shopify itself) offer conversion tracking tools that make it remarkably easy to see how many customers made a purchase as a result of a particular campaign.
Of course, while it is valuable to understand how much it cost to acquire a new customer, this number is rather meaningless unless you view it in relation to how much each of those customers spends on your product or service (the LTV).
After all, a CAC of $50 is fantastic if you’re selling a high-end product that sells for thousands of dollars. If your average customer purchase comes out to only around $10, however, you’ll be going out of business pretty quickly. Your CAC is far from the only overhead you have for your company, which means a low LTV will be catastrophic for your long-term success.
This is why it is essential that your LTV profit exceeds your CAC. New businesses should take this a step further by trying to create a situation where the profit gained from a customer’s first transaction with your company will exceed the CAC. Established businesses can often wait several months to recoup the cost of a new acquisition, but for small businesses that are low on cash, this usually isn’t an option.
For Shopify store owners, this means you need to find a way to make more money out of every transaction. Whether this means getting customers to spend more during that initial purchase or finding ways to keep them coming back for more, maximizing the monetary value of each transaction will ultimately allow you to spend more on paid advertising acquisitions while still being profitable.
So how do you determine your LTV? While this is a bit easier to calculate if you have a subscription-based service, even new e-commerce companies can use a few simple formulas to get a basic idea of where they stand with this important metric.
For most e-commerce stores, the chances of each of your customers spending the same amount on their transactions is pretty slim. Each customer is also going to vary in how many times they come back to your store to make a purchase. One person might make a purchase worth $20 and never return to your store, while another could come back every month to make smaller $5 purchases.
As a Shopify store owner, you’re already in good shape for accessing this data. By taking a look at your Reports section, you can get data from your current customers to determine crucial factors like average order value, as well as purchase frequency and recency. This allows you to break down metrics on a customer by customer basis, and even more importantly, find the averages for these variables so you can estimate your LTV.
To determine your LTV, start by finding the average of how much your customers spend during each purchase. Next, look at the average number of purchases made during a selected purchase cycle (this could be done on a monthly, quarterly, or yearly basis). Multiplying the average purchase value by the average number of purchases will give you a basic understanding of how much you earn on a per-customer basis during that time period.
You might be tempted to put your calculator away at this point, but your work isn’t done quite yet. While there are other equations available to help you determine your LTV, the simplest method is also the one that has the most straightforward application for relatively new entrepreneurs — the one additional piece of information you need now is the average customer lifespan.
Once again, subscription-based companies have it slightly easier than other e-commerce entrepreneurs. Customers make monthly payments, and when they unsubscribe from your service, their “lifespan” has come to an end. With e-commerce stores, an “active” customer could realistically go several months between purchases. While your Shopify recency data can help you determine an average lifespan, analytics expert Avinash Kaushik notes that newer e-commerce stores are generally best served by estimating this value at three years. Then, simply take your average yearly customer value and multiply it by the average customer lifespan. This is your simple LTV measurement. If you’re doing things right, it should be much larger than your CAC — and if you want to become even more profitable, you’ll be actively trying to increase that gap. It’s simple, really. Increase your LTV profit by making more money on each transaction so you can invest in bringing in new customers. Repeat. That’s the secret to explosive growth. Pretty straightforward, right? But how do you actually go about increasing your LTV? A few key reverse optimization tactics can ultimately make a huge difference for your Shopify store. Let’s take a look at some of the simple things you can do to generate a bigger LTV and lower your CAC so you can dramatically improve your profitability.
1) Psychological Pricing
Have you ever wondered why so many products are priced at $19.99 or $29.95 rather than $20 or $30? Psychologists have dubbed this the “left-digit effect” because as Jamie Madigan explains, “the left-most digit disproportionally affects our perception of price.” Madigan goes on to note that this makes a huge difference in buying decisions: “The fastest-moving part of our brain actually starts to encode the information before we actually finish the left-to-right process of reading a price. Thus $59.99 is seen as meaningfully less than $60.00 because that leftmost ‘5’ is coded as meaningfully less than the 6. Sure, the relatively slow moving, rational part of your brain catches up an instant later and recognizes that a penny’s difference means nothing, but the snap judgment has already been made and perceptions of price are now subtly biased.” In other words, lowering your product pricing by a single cent could be enough to increase your number of sales.
This isn’t the only way you can alter your pricing strategy to encourage more purchases from your customers. A 2013 case study published in The Wall Street Journal reported that Williams Sonoma was able to improve sales for a $275 bread maker by introducing a slightly better model for $429. Placing the two items side by side in a print ad nearly doubled sales for the $275 bread maker. So what happened here? Essentially, customers were no longer looking at that $275 price tag in a vacuum. They were instead forming instant comparisons to the more expensive model and finding it easier to justify buying the less costly version. The purchase that may have seemed too expensive before now looked like a great deal. While a tiered pricing model may not work for every Shopify store, there is significant power in offering comparison pricing. As this example reveals, introducing a “premium” product could help your “normal” product sell better. By highlighting features and pricing differences between different models, you’ll make it much easier for customers to make a quick buying decision.
2) Leverage the Power of Free Shipping
Anyone who has ever shopped on Amazon knows how tempting it is to buy one more item so they can qualify for free shipping. It’s a genius strategy, and one that has a direct impact on increasing the LTV of Amazon’s customers. Thankfully, it is also quite easy to apply to your Shopify store.
A good way to accomplish this is by looking at your store’s average purchase value. Let’s say that the average customer purchases about $40 worth of merchandise from your store. If you were to enact a free shipping threshold that activated at $50, you would suddenly create extra motivation for your customers to add another item into their cart. More often than not, the additional income generated by the extra product purchase will outweigh your shipping expenses.
While it may be tempting to further increase your threshold to motivate even more sales, it’s best to be cautious when raising this limit. Amazon was recently forced to lower its free shipping threshold from $49 to $25 after Walmart introduced a free two-day shipping offer on $35 purchases. If you raise your discount threshold too high, you run the risk of losing customers trying to fill their cart for the discount — and you may even send them to your competition.
3) Social Proof
The value of social proof is just another illustration of how psychological factors can help you optimize your Shopify store and improve your LTV. Human beings have always valued social proof, but in the digital age, the importance of this marketing strategy has become even more crucial for enticing potential customers to buy.
In fact, research has found that a whopping 84% of people “trust online reviews as much as a personal recommendation, [and]…68% form an opinion after reading between one and six online reviews.”
Before customers buy something, they want to have confidence that it will be good. This is why we ask for recommendations from friends and family when choosing restaurants or auto repair shops. It’s also why Amazon’s review system has helped fuel its massive success.
Naturally, giving customers the option to leave product reviews on your site can help lower your future CAC by alleviating the doubts of other potential customers. However, this is far from the only form of social proof you can implement. For example, you might try featuring customers using your products on your social media channels — some Shopify apps even allow you to feature these social media feeds on the product pages themselves.
Even displaying numbers of how many visitors have purchased an item or added it to a wish list can act as a type of “positive peer pressure” that entices others to buy. If hundreds of other people have already bought this product, it must be good, right?
4) Satisfactory Service
In direct relation to social proof, making customer satisfaction a top priority is an absolute must if you wish to improve both your LTV and CAC. After all, while a satisfied customer is more likely to buy from you again, a dissatisfied customer is apt to leave negative reviews that keep others from buying from your e-commerce store.
This means that you need to make delivering a stellar product your top priority, and this starts with the products themselves. While every Shopify store is different, no store is going to gain much traction with subpar products. Whether you’re producing the items yourself or selling them from a third-party manufacturer, you need to rigorously test your products to ensure they live up to the reputation you wish to establish.
Shipping is another important area that can have a big impact on customer satisfaction. While Shopify streamlines the shipping process with easy label printing, real-time shipment tracking and the ability to provide flat rate shipping, it’s still worth it to periodically reevaluate this part of your business and look for ways you can further improve.
Of course, there’s no way to 100% guarantee that your customers will always have a satisfactory experience. They might get a defective product or a a problem could occur during shipping. This is where your customer service team really needs to shine. Do you have answers in place to help resolve a customer’s problems?
Making your service options clear from the get-go is the best way to handle these issues. Information regarding returns and complaints should be easy to find, with clear instructions that will help the customer achieve a satisfactory outcome. When you provide a prompt, professional response to customer complaints, you greatly decrease the likelihood of losing that customer for good — and you protect their LTV.
5) Re-engagement Starts In-Store
Getting someone to buy from your Shopify store is great — but how do you get them to come back? This is one of the central elements of increasing your customers’ LTV, and can sometimes seem easier said than done. After all, you don’t just want a customer to come back in six months. You want them to come back regularly, and ideally, they’ll be making larger purchases each time.
The good news is that the moment someone makes a purchase from your site, you have the opportunity to begin the retargeting process. This can begin with something as simple as providing optional boxes during checkout where a customer could agree to receive email newsletters and promotions — or better yet, join a loyalty program.
Having your customers opt-in to newsletters and other promotional messages during checkout is a great way to spread the word about sales and new product offerings. Best of all, these emails will be going to people who specifically signed up because they wanted to receive your messages — so they’re far more likely to buy in the first place.
Loyalty programs can be especially effective at increasing the LTV of your customers. There’s a reason airlines and other major brands use this tactic: by rewarding a customer for choosing your business, you make them far more likely to buy from you again, all thanks to the promise of eventually gaining access to discounted or free items. Shopify itself notes that loyalty programs “can increase repeat shopper annual visits by up to 20%.” By giving your customers the option to join a loyalty program or opt-in to email messages during the checkout process, you’ll have a much easier time retargeting them and driving repeat purchases than you would with a complicated SEO campaign.
6) Website Optimization
You could have the most amazing product lineup in the world, but if your website design leaves something to be desired, you’ll have a hard time getting customers to complete their purchases. Because of this, improving your on-site conversion metrics should be one of your top priorities. Even seemingly minor factors like website speed and mobile optimization can have a huge impact on your CAC. If you miss out on hundreds of potential customers simply because you have ugly images on your landing page, your CAC will likewise increase — and you’ll have a much harder time keeping your LTV at a profitable level.
Site navigation should be your primary focus when trying to improve your website’s functionality. For example, all calls to action on your store should be clearly visible to naturally draw in the customer’s attention. Many Shopify stores accomplish this by using a featured banner to highlight selected products or sales, while also incorporating a distinct call-to-action button that will take a user directly to where they can make a purchase. This simplicity should carry over throughout the site. Don’t overwhelm visitors with a host of menu options. Make it easy for them to find what they need with simple drop-down menus. This is one area where using Shopify to set up your website can make a big difference, as there are countless “themes” available to help you set up a user-friendly site that is visually appealing and easy to navigate. Just be sure that your selected images match the quality of the layout!
7) Safe, Streamlined Checkout
Cart abandonment is a serious problem that plagues nearly every e-commerce store, driving up acquisition costs and limiting the opportunity to gain new customers. All too often, the reasons behind these abandoned carts are entirely avoidable. So what can you do to stop cart abandonment? As with website navigation itself, you need to keep things as simple as possible. The fewer steps someone needs to complete to make a purchase, the less likely they are to give up before they check out. For example, many shoppers prefer to make their purchase as a “guest” — yet many sites force visitors to log in to make a purchase. Creating a profile is too much to ask for many visitors, which can cause someone to click away from your store and never come back. Case in point: after online retailer ASOS eliminated the requirement to create an account during checkout, their cart abandonment rates dropped by 50%.
Even little steps to speed up the checkout process like enabling predictive entry for online forms or condensing checkout to one or two pages will make it easier for a customer to complete their purchase. Of course, ensuring that a customer can pay in the way that is most convenient for them (be that a credit card, Google Wallet or Paypal) will further reduce cart abandonment. Finally, don’t overlook the importance of providing a secure checkout. In a day and age when credit card hacks and other data breaches are increasingly common, using a secure connection (or SSL certificate) is essential for protecting customer data. Trust logos and explanations for why you need certain pieces of information can further increase customer confidence and reduce the likelihood of cart abandonment.
8) Create Exclusivity
What makes Black Friday and Cyber Monday some of the biggest shopping days of the year? It all comes down to those limited deals that are only available during “doorbuster” specials. As a Shopify store owner, you don’t have to worry about a physical stampede of customers trying to get to your products — but by creating a sense of scarcity or exclusivity, you can greatly increase store visitors’ motivation to buy. Studies have repeatedly found that both quantity-related and time-related scarcity can lead to significant sales increases. This ties directly into what is known as FOMO, or fear of missing out. If we discover that a special deal is about to end or that a desired item is nearly sold out, we become much more driven to act quickly to make a purchase.
You can use FOMO to create a mad rush to buy your products (without the violence) when you use these tactics in your Shopify store. For example, highlighting that you only have “two left in stock” of a particular product can increase the perception that there is high demand for your item. Alternatively, a special sale that only lasts for a single day (or even the next fifteen minutes) can prompt customers to act quickly in an effort to get that great deal. To really give your LTV a boost, consider sales promotions that encourage customers to buy more to receive a discount or other special offer. Scarcity can be especially valuable when reaching out to those who have opted into your loyalty program or email newsletter — providing exclusive deals will make your subscribers feel special, which in turn will increase their likelihood to come back to make more purchases.
9) Consider a Monthly Subscription Model
While this last optimization tactic may not work with all Shopify stores, there’s no denying the incredible impact monthly subscription models have had on the e-commerce industry as a whole. Subscription boxes have experienced massive growth in the last few years, fueled in large part by a young, tech-savvy customer base.
A wide range of industries have gotten in on the subscription box craze, with food, fashion, hygiene and makeup and even pet products being offered through this business model. Some businesses allow the customers to pick exactly what goes into their box, while other retailers “surprise” their subscribers with personalized products based on the customer’s unique preferences.
The subscription box model is fun for consumers, but it also offers many key advantages to Shopify store owners. First and foremost, this tactic can significantly increase your LTV by ensuring that your customers are “buying” your products every month. Not only does this increase your monthly profits, it also makes it easier to calculate your LTV so you know how much you can afford to spend on marketing.
Subscription boxes make it easier to plan stock and inventory needs, as you can more accurately predict order volume. They can offset seasonal buying lulls, ensuring that you still have a steady revenue stream even when there are less people visiting your store.
Millennials in particular enjoy the novelty of receiving a monthly subscription box relevant to their interests. With clever packaging and a great selection of items, you’ll improve your customer retention rates and maximize your LTV, simultaneously improving your profit margins and building a solid baseline for success. Don’t forget, those same people who use your subscription box service also become more likely to make additional purchases in your store!
You’ll notice that the majority of these reverse optimization strategies don’t focus much on marketing at all. Yet they all focus on the same crucial point: increasing customer LTV and decreasing CAC. While marketing certainly helps in the growth process, this focus is how companies big and small have achieved success.
By focusing on these and other strategies to optimize your Shopify store, you will improve the overall customer experience and land bigger sales. Of course, as you earn more money from each transaction, you can subsequently devote more of your resources to paid advertising acquisition and increase your profits even more.
As you lower your CAC and improve customer LTV to maximize your return on investment, you’ll achieve the growth that will help your Shopify store rise to the top.
Don’t wait! The sooner you begin the optimization process, the better positioned your store will be to make that jump to the next level.