From Series: Email Marketing Metrics That eCommerce Companies Should be Tracking
Email marketing campaigns are the primary way merchants communicate with existing customers and acquire new ones. Email is fast becoming the main source of marketing for many companies, and for good reason. According to the Direct Marketing Association email’s ROI is sky high. 4,300% The biggest bang for your buck where a conversation between you and your customers turns into a form profitable relationship.
Consumers are bombarded daily by emails vying for their attention. Thousands of eye catching emails sing the praises of the newest product, offering deals and discounts and more value. To gain the competitive edge in this increasingly saturated market, you must know who your customers are, how to keep them and how to acquire new ones.
However eye catching your emails may be, if you are not knowledgeable about your customers, you may be throwing away valuable time and resources. In this post we’ll talk about customer level metrics that can help you optimize not only your email campaigns, but get the most out of your entire relationship with your customer.
Customer Lifetime Value and Subscriber Lifetime Value
Think of your relationship with your customers as a curve. In this curve, your customer will go through several phases – much like any relationship. This one, however, starts with a purchase. There is a wealth of information and qualitative data you can gather from their first purchase and subsequent ones.
The number of purchases they make as well as how frequently they buy, are clues to just how engaged a customer is with your brand and product.
Customer lifetime value (CLV) is a projection of the value of a given customer over their entire relationship with your brand. Customers are worth much more than simply the dollar value of the profits they generate. CLV can tell you what you will earn later from what you are spending today.
The simplest way to calculate CLV is to take the profit you generated from a given customer and subtract the money you spent on acquiring them. Wait, did you think it was going to be that easy? Here are the complex analytics behind it. Because it’s impossible to predict exactly how long a relationship will last, usually it is given specific time frame (12 months, 24 months etc.)
If calculating complex math formulas doesn’t sound like your idea of a good time, you’ll be happy to know there is a simpler way. With this method, we’re going to calculate on a yearly basis. All you really need are some simple points of data and a spreadsheet. You will need to know your customers’ AOV (Average Order Value), their Repeat Purchase Rate, and your Customer Acquisition Cost.
SIMPLE CLV CALCULATION – EXAMPLE
Note: you may want to consider discounts, but this formula will help you get the basics. If you want a more complete method then you’d want to use the spreadsheet below:
FULL CLV CALCULATION – EXAMPLE
Calculating in years gives you a more realistic, longer term perspective. We recommend using about 5 years, though this example only uses 3. We’ve marked in yellow the areas where calculations will happen, while the blue cells contain data that you should already have. If you want a super simple and easy approach there are several calculators that may help you get your numbers fast.
Why is CLV so important?
CLV is crucial to understanding your customers and can be a powerful tool in allocating marketing resources. While it is easy to calculate how valuable a customer is based on their past behavior, predictive CLV calculations can also give you insight into how a customer’s value will shift over time.
So what if you are only interested in the value of a customer as it relates to a given email campaign? This is where Subscriber Lifetime Value or SLV comes in.
Subscriber’s Lifetime Value is about customer activity and how they interact with the conversations (emails) you send. Profiling customer behavior is essential for companies focused on selling more to existing customers.
Subscriber lifetime value is great for retaining customers, but it also tells you which customers you need to focus more on to hold on to. Why is this important? You probably want to know the dollar amount of gain you are getting from every email you send, as well as what you can afford to spend to acquire new customers.
Here is the magic formula:
Note that the formula here goes month to month so calculating the lifetime value of your customers as a whole may seem like the right thing, but it is proven that a month per month basis is more helpful in terms of subscriber value. You have a clearer idea of what your emails are making every month allowing you to use diverse email tactics (perhaps apply what you learned from the results of your last A/B test – for example.)
As you can see email subscriber lifetime value is similar to CLV but we are instead using the email subscription. We are looking at the profits of an email subscription, not the total profits of the customer as a whole.
To get the lifetime value of an email subscriber you need :
1. Number of active subscribers (per month)
Only the users actively subscribed are capable of generating revenue via email. Bounced addresses and unsubscribes are inactive, but so are subscribers that have stopped opening and clicking. It’s up to you to decide when subscribers become inactive.
2. Email marketing generated profits
Make sure you are not including any profit generated from non marketing related efforts. Use your CRM to get these numbers.
Remember our CLV curve? Let’s bring it back. Essentially, you want to use this curve as a way to see where friction rises. Friction in this sense is the likelihood a customer will continue their business with your brand, whether their interest is heating up or cooling off.
The curve visualizes the various stages your customers will be in throughout their relationship with your brand. The secret is knowing when to target them with the right content – personalized for their behavior – increasing impact. As we can see, the best times are usually at the beginning and end. At the beginning of the curve, customers are highly engaged, interested and receptive to new marketing. While at the end of the curve, engagement is tapering off as friction rises. These are the two times in the customer lifecycle that your marketing packs the biggest punch, make sure you are capitalizing on this.
What is RFM?
You’ve probably heard of the marketing phrase “80% of your revenue comes from 20% of your customers.” Meaning that a small chunk of your customer base is the source of most of your revenue. Yup, that’s right, only a few customers are really giving you most of your profit, so it’s no surprise that most marketers focusing much of their efforts on retaining these high ticket customers.
Perhaps, you’ve even heard of RFM before. It stands for Recency, Frequency, Monetary. As a whole, RFM is a method used to quantitatively measure which customers hold the most value. It measures how recently a customer purchased, how frequently they purchase, and how much money they spend.
RFM got its start over 40 years ago, back when people would shop with catalogs. Yes, catalogs! They would pick out what they wanted from the catalog, mail in an order form and receive their package in a couple weeks time. Catalog marketers discovered three things:
- Customers who made a recent purchase were more likely to purchase again than customers who had been inactive for quite some time.
- Customers who purchased more frequently were more likely to buy again than infrequent purchasers.
- Customers who spent more had a higher chance of buying again than someone who spent less on a purchase.
While the days of mail order shopping have been replaced with drone-powered shipping and one-click purchases, these same principles still hold true in today’s e-commerce marketplace.
RFM is a valuable marketing strategy because it allows you to identify which customers are generating the most profits and what it takes to keep them coming back. Furthermore, in looking at the behaviors and preferences of these most valuable customers, you will be better equipped to go after these same types of customers when acquiring new ones.
How to calculate RFM scores
You need these 3 things:
1) Most recent purchase date
2) Number of purchases within a given time period (usually a year)
3) Average sales per customer
Your best customers will have the highest scores. You can now analyze the behavior and preferences of this particular group of customers and what sets them apart from the pack. You have a wealth of data at your disposal. Use RFM to focus your efforts on the most responsive segments of your customer base.
What campaigns can be used to keep the 20%?
Everyone likes to feel welcome right? We are emotional beings that need to feel wanted and included. The email world is no exception.
Welcome campaigns are a series of automated emails that trigger after a subscriber opts in. Rather than a generic email to a subscriber to confirm their opt in, a welcome program aims to build a solid relationship early on in the process through a series of automated emails.Welcome programs aim to engage a customer while they are fresh off their opt in and research consistently shows that new customers are the best ones.
However we know that customers are constantly bombarded by other options—newer, cheaper, shinier, so it’s easy to see how interest can drop off as little as two weeks in. As evidenced by waning open and click rates, it pays to capture your customer’s attention early on and maintain a strong presence in their inbox.
Elements for an engaging welcome letter:
- Thank you
- Contact info
- Links to relevant content
- Clear and concise copy
VIP customers are those on your list that qualify as highly active and engaged with your brand, they also tend to have the highest CLV and SLV scores. These campaigns are targeted specifically to these big spenders and the aim is to increase loyalty. Big discounts and incentives are usually offered to these customers. It pays to keep them satisfied.
What campaigns can be used to target those customers that haven’t bought in a while?
So you want to reach out to those customers who have bought in the past, but haven’t made much movement recently. With the right approach you can get back in these folks’ good graces.
Re-engaging old customers is far easier than trying to acquire new ones. It takes less marketing effort to give familiar existing customers some extra attention and TLC than it is to round up a whole new crop of prospects you know nothing about.
Many marketers do this with win back campaigns. These campaigns are designed to do exactly what they say–win back old customers that have gone dormant for whatever reason. Win back campaigns are special in that they separate entirely inactive users from ones that haven’t made a purchase in a given period of time.
We recommend sending two emails in this campaign. The first email aims to reach out the customer and let them know you are feeling the pain of their absence.
Use a subject line that catches their eye:
- Where did you go, Cathy?
- We miss you, Fred.
- Did you forget about us, Sue?
The second email should offer the customer incentive to return. The goal is to motivate these customers into making another purchase and reduce customer churn.
The 2014 State of Marketing Report points out a shift in the marketing funnel. Before marketers were focusing on the acquisition portion, however now many marketers are seeing more value in retention and re-engagement. Metrics such as Customer Lifetime Value and Subscriber Lifetime Value allows for a more accurate and bigger picture measure of the value of any given customer. Marketers can determine which customers are worth pursuing and in what areas their resources could be better spent.