Everyone in e-commerce has heard of LTV (lifetime value) and the importance of this metric for the health of your business, and it’s ability to scale sustainably.
What’s often overlooked when it comes to the discussion of LTV as well as general e-commerce strategy is the velocity of LTV. Simply put, the velocity of LTV is how quickly your customers come back and buy from you over a desired timeframe. Or, how much more a customer is worth to you and the incremental value of that customer over the respective timeframe.
Why is this metric important to monitor and optimize for?
Take an example. If you’ve been in business for 10+ years, and are looking at your cumulative LTV since inception, chances are that your LTV will be quite strong. While this is great, it’s not as impactful when it comes to scaling your e-commerce business as the velocity of LTV over a 1-3 month timeframe.
Recouping profit from a customer quickly allows your business to finance a more aggressive growth rate if desired, and generally speaking be in a better cash position to re-invest into the required inventory you need to continue scaling at your desired growth rate. With acquisition margins on mediums such as paid social and paid search being quite slim, the majority of businesses will rely heavily on the retention channels such as email/sms to drive the profit needed for the business to be in a healthy position.
Another reason this is important when it comes to scaling is due to the cohort of customers that you acquire as you increase spend. If you’re looking to make a big push, and increase spend aggressively while maintaining a certain net margin as a business you’ll benefit tremendously if the velocity of LTV is high. In most cases, as you increase ad spend you will see a drop in efficiency meaning it will be more costly to acquire customers. With this in mind, if you increase spend aggressively, want to maintain a healthy margin, but have a prolonged period of time before a customer value increases healthily then you will face difficulties financing an aggressive growth rate due to the loss in margin and timeframe it takes to recoup profits on the acquired customers in this phase.
On the other hand, in the same scenario if have a high velocity of LTV you’ll be much more comfortable scaling aggressively due to the speed at which you are extracting profits from the acquired customers. This will have somewhat of a snowball effect as the cohorts of customers you acquire while scaling aggressively begin to come back and repeat purchase on a shorter time frame. You’ll see return customer revenue increase, which is your most profitable chunk of revenue as a business most often.
All in all, you’ll be in a much better position as a business if you can increase the velocity of LTV. It will unlock more flexibility and breathing room as an e-commerce business, giving you more working capital and less issues financing growth.
An important topic to note when it comes to velocity of LTV, or cumulative LTV for that matter is your financial situation as a business and return customer revenue pie. If your business has outside capital and resources to pull in, this is less of an issue. If you’re bootstrapped then this needs to be a focal point in how you operate. In either scenario having a high velocity of LTV will be a massive asset, and something that should be strived for. However, if you have capital at hand then perhaps waiting an extended period of time to extract profits from a customer is a viable way for your business to scale.
To wrap things up, ensuring your retention marketing strategies are built around increasing the velocity of LTV of your customers will allow your business to unlock more growth potential in a sustainable and profitable way.
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