What is the secret that enables the world’s largest OMO retailer, Amazon to make billions of profit by constantly adding “free” benefits (such as free videos, music, book rentals and so much more) into its popular subscription membership service, Amazon Prime?
What Malaysian retailers can learn from amazon’s billion-dollar secret?
The secret is summed up in a single important metric: Customer Lifetime Value (CLTV).
It goes without saying that Amazon cares about the experience it provides to their customers.
However, it also offers these irresistible benefits to enrich the customers and increase the CLTV.
A statistic in 2019 showed that Amazon Prime members spent an average of USD 1,400$ on the online shopping platform every year, compared to USD 600$ spending of non-Prime members.
During the same period, there were around 103 million Amazon Prime members in the United States.
By creating the Amazon Prime program, not only did Amazon effectively increase the LTV with the subscription fee itself, but it also gave a reason for members to prioritize purchases from its platform over the competition, since they are already members and will get free shipping.
It seems like Amazon is giving an unlimited number of benefits away.
It is also true that turning someone into a subscriber can drive an incredible amount of value for their retail business.
Now that you understand the importance of LTV, let’s learn how to measure it.
How to Measure Customer Lifetime Value (CLTV)?
So, how to measure Customer Lifetime Value (CLTV) and apply it to your business?
There are several methods to determine the CLTV, but we recommend using this simplest formula below:
LTV = Average Value X Number of Transactions X Retention Time Period
Example:
Let’s take a skin care products shop as an example.
The average basket size of each customer is RM100.00 and the customer visits the shop to make a purchase 6 times per year.
If the loyal customer stays with the brand for 10 years, the calculation of LTV will be:
LTV = RM100 X 6 times of Transaction X 10 years (Retention Time Period)
= RM6,000
So, How to Increase Retail Sales by Leveraging LTV?
There are three ways to increase sales by leveraging LTV:
- Increase the number of loyalty customers:
- Using the example of the skin care product shop above, the LTV is RM6,000 forone loyal customer. If a shop has 500 loyalty customers, the sales will be:
Current customer base: RM6,000 X 500 = RM3,000,000
By increasing the number of loyal customers from 500 to 1000, the revenue will be:
RM6,000 X 1000 = RM6,000,000
- Increase the number of transactions:For example, each customer visits the shop and make a purchase 6 times per year. When the number of transactions increases to 7 per year upon the implementation of promotion programs, the calculation will be:
LTV = RM100 X 7 times of Transaction X 10 years (Retention Time Period)
= RM7,000.00
Current customer base: 1,000
RM7,000 X 1000 = RM7,000,000
- Increase the average order value (AOV) or average basket size: Previously each transaction was RM100. After a 10% increase, each transaction is now RM110.
LTV = RM110 X 7 times of Transaction X 10 years (Retention Time Period)
= RM7,700
Current customer base: 1,000RM7,000 X 1000 = RM7,700,000
Once we understand how LTV is measured, we know how Amazon increases sales by leveraging LTV.
By giving out the free gift and special price, Amazon Prime increases the transaction and basket size of their loyal customers.
Subsequently, the loyal customers will introduce Amazon Prime to their friends, thus increasing the opportunity to expand the loyalty customer base.
Takeaways
For businesses that follow a data-driven strategy, Customer Lifetime Value is one of the most important metrics to maximize business growth.
It can be used to drive sales, marketing, product development, and even customer service decisions.
However, it should be viewed as one component of your overall approach.
Other factors such as customer retention, satisfaction, and brand loyalty all go hand in hand with LTV.
It’s a financial advantage of having loyal customers and investing in them.
Ecommerce retail businesses with a high LTV can grow independently of ad spend and still generate a consistent cash flow over time.
So What’s Next for Our Malaysian Retailers?
Fret not, it’s not necessary for you to build your own tool or system to make this happen.
You can leverage existing reliable and ready-to-use omnichannel systems like 91APP, one of the fastest growing new retail solutions in Asia.
The built-in features and functions of 91APP enable you to utilise your online and offline data to understand your customers better and encourage higher purchase frequency and greater basket size.
The holistic backend data collection and analysis system comes with comprehensive CRM capability to help you understand your customer behaviour and improve customer retention.
Check out how you can grow your retail business and build customer lifetime value by leveraging the 91APP omnichannel/new retail solution.
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