How Customer Lifetime Value Affects Your Shopify Store
Why Focusing On Short Term Thinking Hurts Your Business
Should You Try To Maximize Profit When Acquiring Customers?
Getting more customers grows your business.
And it makes sense that you should make money while you do it.
But here's a counterintuitive strategy that will make you think about your advertising campaigns.
Because I’m going to suggest that maximizing profits is actually the wrong approach.
The "Secret" Strategy Of Direct Marketing Giants
This is a secret I learned from old school direct response.
The marketers who put sales letters in the post (yes, like sent that old fashioned thing called physical mail) and made a ton of money doing it (they still do).
One of the most successful companies of this kind had a really strange rule for it’s marketers.
If they made money on a Customer Acquisition campaign…
They Got Fired
It was basically the biggest marketing sin they could make.
Instead, they only wanted their marketers to breakeven on a Customer Acquisition campaign.
That means they don’t make money… and they don’t lose money.
The aim was for every $X they invested in customer acquisition, they wanted to get $X back and a new customer.
New Customers Are More Important Than Quick Profits
By breaking even... they get new customers for free!
And then their Backend Marketing System kicks into place and that’s where they make all their profits.
By sending happy customers more and more offers.
And this is exactly what you should do with your Shopify store.
More Money... More Customers
Say you have a product that costs $20 and it costs you $5 to make and ship it leaving $15 in gross profit.
So most marketers and business owners will go out and try to get a new customer for $5 so they make $10 profit.
But if you can only pay $5 to get a customer then you can only run ads in certain places.
By investing $15 to get a customer you can start running ads in a lot more places that your competitors can't afford.
But Don't Believe Me... Believe The Math
Company 1 can invest $5 to get a customer and so their ads stop being profitable and get turned off after 1,000 sales.
So they got 1,000 new customers and $10,000 in gross profit.
Company 2 invests $15, so they can advertise in more places and make 3,000 sales before the ads start losing money.
Which means 3,000 new customers but $0 profit so far.
Customer Lifetime Value = Greater Profits
Customer Lifetime Value (CLV) is the amount that these customers will spend over their lifetime with the company.
Let’s say our Customer Lifetime Value is $100 profit.
That means some customers spend nothing, some spend $100 and some spend $1,000 etc and it averages out at $100 per customer.
So Company 1 has 1,000 customers and makes $100,000 plus their original gross profit of $10,000 ($110,000 in total).
And Company 2 has 3,000 new customers and makes $300,000.
It Pays To Be Patient
With this strategy, the tortoise definitely beats the hare.
By only aiming to breakeven on customer acquisition you can dominate your market by running ads in more places...
And make more profit by focusing on Customer Lifetime Value.
Plus you can try it right now with any profitable campaigns that you're currently running just by increasing their reach.
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