Understanding and Increasing Amazon Customer Lifetime Value

The importance of customer lifetime value (CLV) cannot be understated. It is the ultimate method to maximize revenue, increase repeat purchases, and develop customer loyalty. You will want to pay close attention to understanding CLV as well as how to determine your customer lifetime value calculation.

This article is for you if you are among the thousands of business owners struggling to maintain customers. Below, we address all of your questions regarding CLV on Amazon.

customer lifetime value calculation

1. What is Amazon Customer Lifetime Value (CLV)?

The most common customer lifetime definition is your average revenue between all of your existing customers. The higher this is, the more often your customer makes two (or more) purchases.

It is also known as LTV or just lifetime value.

The loyal customer will contribute positively to this CLV. So the more customer retention you have, the better your results will be. Your customer retention rates are significant because it is easier to sell to someone who already knows you offer a quality product.

The other aspect to these potential customers is the word revenue. Revenue is your earnings minus cost. 

Amazon costs include the following:

  • Amazon Advertising Cost of Goods Sold (ACoS)
  • Shipping (or FBA)
  • Amazon referral costs

As an online eCommerce marketplace, Amazon also provides a value proposition that contributes to CLV.

2. How Amazon Creates Customer Value

customer lifetime definition

Amazon creates customer value through a focus on Jeff Bezos's three customer value propositions:

  • Low prices
  • Quick product arrival
  • A wide range of products

Amazon sets its prices and heavily encourages its sellers to engage in those prices. Sellers who refuse to follow these low price requirements drop in sales rank.

Quick product arrival is provided to customers through an Amazon Prime subscription. For sellers, this involves joining up with Amazon's FBA Program (Fulfillment By Amazon).

The Amazon FBA program enables users to leverage Amazon's logistical network for fast shipping. Much like selling, Amazon prefers those who use their internal resources. 

Amazon also has a massive range of products and categories. Amazon sells well over 12 million products, making dwarf all other eCommerce stores by comparison. 

Buyers flock to the platform to utilize these impressive services. This three-stage process is how Amazon's customer retention rate continues to skyrocket, reducing its customer acquisition costs in the process. 

The more you can retain valuable customers without paying for advertising, the less you have to worry about paying for individual customers. Amazon knows this, which is why the A10 Algorithm encourages sellers who can generate offsite traffic.

How Amazon Sellers Can Leverage This Advantage

To increase customer satisfaction, your first step is to take advantage of all of these services. This means becoming an Amazon FBA seller who offers a wide range of low-cost products.

This also involves taking advantage of everything Amazon has to offer:

There are many more features Amazon has that we won't mention here. As a new seller, you need to take everything to find out what works for you.

It would be best if you also were leveraging third-party platforms to increase your Amazon SEO. SEO, or Search Engine Optimization, is a way to build your products around keywords that increase customer engagement.

The right keywords meet the prospective buyer's needs with ease—part of understanding that is to see how keywords translate to sales with our available tools.

Like all data, it is vital to delve into multiple data sets. Our next section will delve into how you can perform a lifetime value calculation.

3. How To Do A Lifetime Value Calculation (Customer)

To perform a lifetime value calculation, you need to have the following data:

  • Your average sale value - This is the average amount of your earnings per sale. If you make most (or some) of your sales using discounts, you will need to account for those.
  • How many transactions you have - This is the total number of sales you make overall. It would be best if you did not break this down on a per-product basis. 
  • The period of your retention - This data is the time that you are trying to measure. For example, you could measure how often your customer makes a purchase every three years.
  • Your profit margins - Your profit margin is the percentage of gross income you make related to your revenue. So if you made $100 and $60 of that went into costs, your profit margin would be 40% ($40).

Here is an example of how this would work:

  • Your average sale value is $20
  • You are measuring over three years
  • Your customer makes five purchases during that time
  • 20*3*5 = $300
  • Your profit margin is 20%
  • .2* 300 = $60
  • Your customer makes you $60 for their lifetime

You might also apply value calculations to a company.

Company Lifetime Value Calculation

To apply this LTV calculation to a company, you can use the following figures:

How to Calculate Amazon LTV

How Do LTV Calculations Help?

Customer LTV calculations help sellers get a proper expectation for cash flows. Knowing how much money is flowing through your company can help you determine day-to-day operational details.

So if you want to purchase something during a month, you can develop a budget based on how much your customer gives you on a per month basis. You can apply this seasonally, too, as the calculation above can be used anywhere from a per second to a per decade rate.

Just be sure you differentiate what periods you measure.

For company-facing LTV calculations, they can help you see the bigger pictures. Here's how each of them helps:

  • Company LTV - It enables you to see long-term averages of what they should expect to be paid from customers, enabling the setting of long-term budgets and goals.
  • Customer Value - It enables sellers to see the total value of their most loyal customers, affirming strategies that encourage customer retention.
  • Average Frequency Rate - It enables you to compare lagging periods vs. successful periods of bulk customer purchases. This can be helpful if you change your strategy throughout the year.
  • Average Purchase Value - The average purchase value enables you to see whether you need more customers or more purchases. Focusing on new customers vs. retaining new customers is an essential aspect of any eCommerce business.

Much of the company-facing data is built as part of the customer lifecycle.

4. What are The Five Stages of Customer Lifecycle?

The Five Stages of Customer Lifecycle

The customer lifecycle in CLV Marketing is a five-stage process leading your prospective buyer down the funnel of becoming a loyal customer. Understanding this process is essential for knowing the customer journey.

Here are the five stages:

  1. Awareness
  2. Consideration
  3. Purchase
  4. Retention
  5. Advocacy

Knowing these stages will enable you to select appropriate content for them. Writing content that is aware of a customer's step in the journey will appeal to them.

Here is how each of those stages applies to your work as an Amazon seller:

Stage One: Awareness (or Reach)

The awareness stage happens when your prospective customer discovers your product. On Amazon, the discovery is typically found on a display ad or through the search bar.

Customers at this stage are expensive to attract. Seeing an ad or looking at you on search won't guarantee a sale, as they have no reason to trust your product.

The importance of having optimized product listings showing the best side of your product is essential. Also, finding the most appropriate target keywords increases your chances of meeting the buyer's intent.

The buyer's intent refers to the goal of the buyer when inserting a search term. You know you've met this goal well if you have a solid conversion rate on PPC campaigns.

The best way to increase awareness is to try out different things until they work. Work with multiple PPC campaigns targeting various keywords.

You can use an advertising analytics tool to use historical data and see how others are managing their PPC campaigns.

Stage Two: Consideration (or Acquisition)

The consideration stage is when your prospective buyer has decided your company is worth their time. At this point, they are reading reviews and collecting information to see if your product is worth it.

The customer won't stay on Amazon for this, sometimes going to affiliate review websites. At this point, it is essential to note that retargeting efforts through Amazon Advertising are beneficial as a reminder.

Your product listing also should be incredibly detailed to crush any doubts and answer any questions. The goal of your listing is to make your product the most appealing offer available.

You typically see recommendations to invest in a content management system (CMS) for email campaigns and tracking customers. However, Amazon has strict rules against bringing buyers offsite.

So instead, create a social media presence and a website. Once they buy the product for the first time, you can refer your social media through Amazon product inserts. However, you cannot include any URLs or links offsite.

Stage Three: Purchase (or Conversion)

Provided the prior two customer lifecycle stages went well; you will have officially made your first sale (or conversion). Congratulations, but don't start to celebrate yet; you've got a few more hurdles.

First, everything about the sale must go well. This includes having a good customer experience through fast shipping and a quality product.

If the customer returns your product, you will have failed this stage. If you want to avoid returns and reduce your order defect rate, here are some tips:

  • Provide instructions for how to use your product, so your customer does not break it
  • Request feedback so you can make potential improvements
  • Ask the customer to add you on social media and reach out to the customer if they are willing to be on your email list
  • Become an FBA seller, so the product gets there fast, preventing any reasons to deny a sale.

Good customer relationships are established through a fantastic first impression. Just like a first date, if you want that second one, you will need to earn that.

Stage Four: Retention

As an Amazon seller, this is the most challenging part of the customer lifecycle process. Why? Because Amazon disallows most forms of communication.

The Amazon Terms of Service will inform you that you cannot reach out to any customer unless they request it. So asking them for feedback more than once is disallowed.

The product sales period is a great way to add to your email list. But you cannot provide customers a way to trade a discount for an email.

Retention is best done through onboarding processes with personalized communication. But unless they have made an effort to follow you on social media or go to your website, Amazon discourages excessive follow-ups.

You also cannot encourage sales of your additional products unless you add them to the product insert. But if you add that alongside a review request, Amazon may suspect you of incentivizing reviews.

It is vital to use your resources to encourage people to follow your brand offsite. Otherwise, the retention process becomes much more challenging.

Once you get them offsite, you can encourage them to purchase Amazon products, personalize your communication with them, and provide customers direct support where they need it.

Stage Five: Advocacy (or Loyalty)

Once you've gotten to this stage, you know you've done it right. At this point, you have a lifetime customer who would recommend your products to friends and family.

However, most customers won't do that without a bit of incentive. This situation is another reminder as to why it is crucial to establish an offsite presence.

Implementing a loyalty program is a great way to turn customers into advocates. But Amazon's customer messaging won't let you ask to join a loyalty program.

The only loyalty program Amazon is interested in promoting is the Amazon referral program and influencer program. After all, Amazon is a vast company that is pretty good at controlling the large flow of traffic it generates.

So if you want your customer loyalty program or referral program, you will need to bring them to your site and socials. Otherwise, you can continue to rely on Amazon for support on referrals and loyalty.

Creating Your Own Customer Lifecycle Diagram

The thing about it is that each customer lifecycle diagram looks different. Your customer journey is different from the journey of another company.

Customizing your diagram enables you to create strategies around different stages. For example, the extra step required by Amazon might make your chart look more like this:

  • Awareness
  • Consideration
  • Conversion
  • Transition (to offsite channels)
  • Support and retention
  • Advocacy and loyalty programs

You might have branching lifecycle diagrams for people who become part of your email list. With these, you can offer bundling and upgraded product lines through enhanced sales funnels.

Different customer segments will respond differently. Some may prefer to stick to Amazon, while others may like your complete service offerings.

For example, if you sell climbing gear on Amazon, you can transition them to your 20-hour ultimate climbing class for another $50.

Many sales funnels have a chance to continually offer solutions for their customers as they go along pages. One page can offer gloves, another can offer a thermos, and your most expensive package can involve personalized training.

The point is that everyone will eventually have a cut-off point, but some might decide they want the support. As a lower-impact example, Amazon allows you to bundle products together for a discount.

5. All About CLV Marketing

With any business model, CLV marketing is the exact strategy you use for the user experience. In improving your customer's experience, all of the content you make must be useful for the customer.

CLV marketing efforts become useless if you stop providing something your customer can use. Here are a few areas you should focus on:

Social Media

We've already mentioned social media in passing, but it is crucial. So many users access sites like Facebook and Twitter, using them to connect with different brands.

If you've been on Twitter long enough, you know that customers use that platform to express a poor user experience. If you don't respond to customer service within minutes (sometimes), the customer will let you have it on a public forum.

Customer lifetime value and public forums

Social media is a great way to provide tips and tricks about your niche online. It also enables you to announce upcoming promotions and give discounts to loyal followers.

It is also an excellent way to increase awareness of loyalty programs for later-stage customers. Offering commission (in the form of free products or literal money) is a great way to incentivize people to sell for you.

An Email Marketing List

Good business owners understand the importance of establishing an email list. For some marketers, emails come with dollar signs in response. So if you want to make some money, it is on the list.

Getting into someone's inbox is a remarkable feat. It means someone trusts you enough for you to become a staple of one part of your customer's day.

You can respect that through personalized content that addresses them by name. People like to see their name in an email; it catches their attention.

When sending out a marketing email, it is essential to try and avoid being too hard with the sales—instead, focus on providing your customers with value.

Much like social media, this value comes from giving your customer helpful tips and providing free stuff. The free stuff can include things to buy, but those can be entirely optional.

Direct Mail Campaigns

The importance of customer lifetime value on Amazon

Sending a customized letter to your customer might seem a bit old-fashioned, but it sticks out. Some emails get lost in the mix, while social media is easy to forget.

If you want to impact your customers, you sometimes have to think outside of the box. Direct mail can be a great way to remind people of your products and services.

You can tell a story or offer some advice in your niche. You can also thank the customer for buying your product, which sometimes gets lost in the mix.

If you want to shock the customer, you can include money. Having a $1 might seem counterintuitive (after all, you are trying to earn money), but you don't want to be that brand that gets lost in the mix.

It doesn't necessarily have to be money, but try and think of ways to get your customer thinking about your product. A good brand does memorable stuff.

Phone Calls

If you manage to get them on your social media and eventually your website, you have an excellent opportunity to ask for a phone number. Being given a phone number is an admission of trust, so don't ruin it.

Phone calls should be for a few reasons. You can check up to see if they enjoy any recently purchased product or see it as an opportunity for a sale. Bear in mind that you need to be blatant on what you plan on using the phone number for.

You might have broken the law if you say it is for a service call and offer to sell something to them. The US has a Do Not Call Registry that prevents people from calling in to solicit products.

You might also ruin the customer experience if they don't want to talk to you. So schedule any calls around lunchtime or during the afternoon.

You cannot ask for phone numbers via Amazon. Doing so is a bannable offense. You also don't want to share your number, as it is a great way to get incredibly busy.

6. Things You Can Do (On Amazon) To Boost CLV

Just because CLV has heavy benefits for an off-platform focus doesn't mean you cannot leverage Amazon's excellent tools. Here are some tips you can use to improve CLV directly on the platform.

The Amazon Subscribe & Save Tool

The power of subscriptions hits on two aspects of customer behavior:

  • The convenience of receiving regular subscriptions
  • The ability to gain a discount

Subscription boxes provide proof of this, offering consistent growth with auto-delivery services. Having a subscription box takes the effort out of the customer's hands by allowing them to get your product monthly.

Having a consistent subscription also reduces the chances that the customer may try similar Amazon brands.

Creating Bundles on Amazon

Instead of creating a new product listing that includes multiple ASINs under one roof, you can now develop bundles of appropriately associated products. Bundles air relatively new on Amazon but remind us of the success of upselling.

You can consider them similar to the sales funnel example we used earlier when you upsell through bundles. The whole "if you are willing to buy this, how about this" situation.

Not everyone will go with the bundle, but including it as an option is an excellent method of increasing CLV through multiple purchases wrapped into one.

Retarget People Through Amazon Advertising

Amazon Seller Central has a section for display ads, brand ads, and video ads. These are great for targeting keywords on Amazon and should be used to get your first few sales.

However, Amazon also allows for offsite advertising on affiliate sites or other owned sites. For example, if you want to buy a new movie and go to IMDB, you might see an Amazon ad for that movie on the website. Amazon owns IMDB.

The power of retargeting is something like dangling a carrot. It is a reminder that the product is there but not so annoying that it overtakes their browsing.

The simple reminder increases your odds of selling. After all, they have already expressed interest in your product by reaching stage two and doing research.

Become A Member Of The Amazon Brand Registry

The Amazon Brand Registry is Amazon's list of approved brands. Members receive incentives to use the platform that give them an edge over the competition.

Here are a few examples:

  • Amazon Brand Analytics
  • Creation of an Amazon storefront
  • Access to Amazon Posts
  • Protection against those who might steal your product line
  • Amazon A+ Content

While it may take more effort to establish your brand on Amazon, it does provide you with the most excellent chance of customer loyalty. After all, you aren't targeting someone for products you sell that are exactly like other people.

Instead, you are selling a unique and identifiable brand that Amazon recognizes.

Being a registry member costs nothing, but you will need to have an active trademark and sell in an approved country.

Use Amazon Posts To Reduce Competitor CLV

Amazon Posts is a method of creating blog-like content on search results and competitor pages. The creation of these posts is accessible to all members of the Amazon Brand Registry, making it an excellent way to draw attention to your products.

Because these posts appear directly under competitor listings, it is one way you can poach products from your competitors. Because of the lack of control behind the post system, it isn't suitable as a primary strategy.

Still, anything that enables you to take competitor customers for free should be utilized.

Amazon Stores

Another feature of the registry is Amazon Stores. These storefronts create a unique URL that enables you to provide a unique storefront on Amazon. Other than clicking on your brand name, Amazon does not usually drive traffic to your store.

The follow button located at the title section of the store enables people to track changes to your store. In this way, you can finally announce the release of new products through Amazon.

However, this is the only thing you can do with the follow button. There is no promotional opportunity here, making it less useful than using a personal email list.

The Amazon Influencer Program

The Amazon Influencer Program is another unique storefront for influencers. It provides a unique way to gain product exposure through a non-standard customer journey.

Influencers merge the first two stages into a single phase. This feature increases the speed you can make a sale, as people can discover and see your product being reviewed in one swoop.

Amazon Live is a direct-to-customer influencer platform directly on the system. Through this, you can increase your odds of making a sale through them.

Be aware that the affiliate rates for influencers are higher. With more social clout, you can ask for more money. So in paying for the influencer's time, you will expect your profit margins to drop.

The results will reduce your overall CLV. So keep this in mind when hiring any influencers.

7. Conclusion

Final Tips for Improving Sales With CLV

Ideally, you will be able to use the CLV process to keep customers forever. While it might seem complicated, the overall process provides a clear picture of what you need to do to keep your customers.

While you can rely entirely on Amazon for this, it does limit your ability to engage with people. Not having a social media presence on a personal website is one way to ruin your CLV chances.

Using formulas will also help you understand how data applies to this. However, the limitations of CLV formulas are that they are static situations.

If you want a more dynamic dataset, DataHawk has an AI-enhanced Amazon report and automation tool tools that can provide you with real-time updates and changes. While CLV is helpful, our complete set of data will give you actionable information with little effort.

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