Customer Lifetime Value Strategy for Ecommerce Brands [Merchant Spring Podcast]

James Dihardjo: Alden, thank you for joining me in your afternoon and my very early morning. Why do not you kick off and tell us a little about yourself and Adverio before we get into the guts of LTV.

Alden Wonnell: Sure. Before we do that, it is great to reconnect, the last time we saw each other was here in the Bay Area at the infamous Wayfair Tavern. Happy to dive in. I am Alden Wonnell, founder of the ecommerce agency Adverio, and I originally got into the Amazon selling space around 2013, right around the time FBA was becoming big and allowing a lot of new sellers in. At that time I was working full-time in finance, but I decided to give it a go and launch my own products in the photography space. To tell you what it was, it was a selfie stick. I saw that fad was on the rise, and all the ones in the market were garbage except for GoPro maybe, so I just looked at negative reviews, made it better, did better packaging, and eventually it became a bestseller in the category within about three months. That was a wild ride, and by way of that I went into consulting. I was part of a network of ecommerce entrepreneurs who started coming to me for advice. Then fast forward to 2018, I left my job at a San Francisco startup, which ended up being boring, and that gave way to me starting Adverio in 2019.

James Dihardjo: Why do not you tell us how Adverio is different from other agencies? I feel like you have a different service and offering compared to the rest of the market.

Alden Wonnell: I would like to think so as well. We are very leading edge, very technology focused, always trying to push the envelope. From 2019 to now we have grown into a 25-person omnichannel marketing partner. I really hate the word agency, we see ourselves as strategic partners in the space, primarily focusing on Amazon and Walmart, but also serving Target, Shopify, Instacart, and other channels our brand partners want to sell on. We found our stride with mid-seven figure to mid-eight figure brands with large catalogs. When we first started, we were serving emerging sellers, but one of our first brands was a mid-seven figure brand, and soon after we took on other mid-seven, low-eight figure brands, and we noticed they all had the same issues with scaling. They had gotten from zero to mid-seven figures and could not scale past that, mostly because they were trying to use the same strategy to get to eight that they used to get to seven. As you probably know from growing your business, the strategy has to completely change, some fundamentals stay, but as the catalog grows it gets exponentially more complex in every place. So in 2021 we decided to focus on scaling technology and tools in areas that address every part of the business, advertising, SEO, catalog optimization, pricing optimization, and it has been massively successful, we regularly see double-digit and triple-digit growth year over year. It ties directly into our topic for the day, LTV, because when we fix all these issues, these brands typically see their LTV skyrocket.

James Dihardjo: So why do not you give us some background on LTV in the context of Amazon?

Alden Wonnell: What is LTV? Let's start there, because some listeners might not know what it means. It is your Customer Lifetime Value, some people call it CLV or CLTV, let's just go with LTV. There are a number of different calculations, the most simple is your average order value or customer revenue, times your average number of transactions per year, times your customer lifespan in years. That gives you the total top-line revenue value of the average customer. It is a universal KPI, every business should be tracking it, because it can dictate what you should be willing to spend to acquire a new customer, what your TACoS should be, what your ACoS should be. Interestingly, brands that started outside of Amazon, especially in the seven, eight figure plus range, definitely know their LTV, they track it consistently and peg it to their industry vertical.

James Dihardjo: Do you think the LTV stuff is relevant for all categories, or more relevant for some?

Alden Wonnell: Great question. There are categories where it is more relevant, like food, supplements, or cosmetics, because these are consumable items you would expect someone to purchase again and again. If we go to a sector like industrial or tools, it is less impactful but maybe still very important, because there are things they can do to increase LTV by increasing the market basket and the items customers come back for. So that is actually an area of opportunity for industries that may not think it is significant for them. We work with a brand that sells oil pumps, grease pumps, and gas pumps, and they think someone is just coming for a one-time purchase for their tractor, but that person ends up coming back for a service hose in their workshop, so it becomes unexpected in those categories.

James Dihardjo: This is a good segue into what is a bad or good lifetime value, and how do you even establish that for your brand?

Alden Wonnell: A good LTV is typically when it is higher than your customer acquisition cost, at least being equal to it. So if your LTV is higher than your customer acquisition cost, that means after you take out your Amazon fees and costs to acquire that customer, if it is positive, that is a good LTV. A bad LTV is subjective because it depends where the business is at. If your customer acquisition cost is higher than your LTV, you are losing money, so that is a bad LTV. But it is subjective because emerging and startup brands always have to spend more on acquiring customers out of the gate, and once they become more established with reviews and a larger catalog, things even out. It is like starting any business, you have to first start that flywheel, get customers in the door, and then keep selling to them.

James Dihardjo: What other metrics beyond LTV and customer acquisition cost should a brand or agency be looking at?

Alden Wonnell: Profit margin, obviously. When you look at LTV you are looking at a top-line revenue number, and you want to take out the Amazon fees, COGS, manufacturing, logistics, and your marketing dollars to acquire the customer, so look at your LTV after those costs compared to your cost per acquisition. The other is your average order value, if you can get that to increase over time by supporting multipacks, size and color variations, cross-selling and upselling accessories, that is something brands should do, and it happens naturally if the brand is merchandised well. Another is repeat purchase rate, there is a metric for this in Amazon, it can give you a baseline LTV but really it tells you what percentage of your sales and orders are repeating from one time period to the next, quarter over quarter and especially year over year. There are really three ways to increase LTV, increase your average order value, increase your repeat purchases, or increase the retention of the customer over a number of years. So basically that is your subscription rate or your churn rate, if you want to talk in SaaS terms.

James Dihardjo: How much interplay do you see between Subscribe & Save programs and driving a better LTV?

Alden Wonnell: It is pretty big, and the places we see it mostly are in food and cosmetics. We have a hemp brand, a protein brand, a cosmetics brand, they all have super high repeat purchase rates. We work with a couple of supplement brands with around a 50 to sometimes 60 percent repeat purchase rate. For brands selling consumables, having Subscribe & Save, and the fact that Amazon created an auto-enrollment program for it, is a huge contributor to LTV. But not every product can be on Subscribe & Save, those that can see a massive benefit.

James Dihardjo: As an agency, how do you educate your clients on all of this, LTV, CAC, AOV, Subscribe & Save?

Alden Wonnell: I have noticed that brands that start off of Amazon know their LTV about 90 percent of the time, but brands that came up on Amazon, where they found their success before branching out, do not know their LTV and often do not think it is important. That is a function of Amazon making it difficult to calculate that number, you have to take a bunch of different pieces and put them together, or have third-party software. Amazon gives you indicators from the repeat purchase dashboard and the customer lifetime dashboard, each with interesting insights, but they do not give you the whole perspective. So it is a learning curve, because most brands are focused on ACoS, and thankfully that is shifting toward TACoS since every agency is talking about TACoS now, which is a good move because most brands use a percent of revenue model to fund marketing rather than an efficiency metric. The next move is to LTV, and it gets some pushback because almost always the answer is, you have a really good LTV, you should spend more money on marketing, and that is the last thing they want to hear. So the way we do it is, before we even take on a brand, we do an LTV analysis for them, and when we take them on we run it quarterly to track how things are going. We also do that because you lose customer data every month that you cannot get back unless you are pulling it into a data warehouse. Once you start tracking it and showing them these reports, they start seeing it increase over time and think, maybe I can invest more in acquiring a new customer, maybe I will have more cash flow to launch a new product or more dollars for tentpole spend. So it is crawl, walk, run.

James Dihardjo: How do you think measuring and talking to clients about a target LTV shapes the whole strategy?

Alden Wonnell: Let's say your client wants a 10 percent ACoS, you are willing to spend 10 dollars to get a customer that spends 100 dollars, and you are basing that off one purchase, not taking into account they will come back. Let's say that customer on average purchases two times a year and their average lifetime is two years, so two times two is four, times a hundred is 400, now you should be willing to spend 40 dollars in the same light. What you do is invest more in marketing and top of search ad placements, and you potentially take those customers at a loss for that first purchase, but within a defined time range, three to six months, they will have way more profit down the line. So it is about funneling new customers for a future payoff. The second way is to use it to forecast cash flow to finance inventory, new product launches, tentpole ad spend, because once we realize those profits we have more money to grow faster in operations, not just more ad spend. And a really intriguing way to use LTV is avoiding price discounting and price wars. Why do brands discount? To get rid of inventory that is not selling through, but also to acquire a new customer ahead of a competitor. If you do not want to lose your brand integrity, look at it in terms of LTV, if I was going to give a 20 percent price discount, maybe I will just spend 20 percent more on acquiring that customer and keep my price the same. That way you keep your brand integrity and do not participate in a price war, which always ends badly.

James Dihardjo: How do you actually calculate these numbers? We were talking about new tools in Seller Central, can you tell us more about native tools to calculate this?

Alden Wonnell: Natively, not much. There is the repeat purchase dashboard, in the repeat purchases behavior dashboard which is in brand analytics, if you pull up the last year you will see your repeat purchase rate. I like to look at it by the year, but you can look at it by quarter, week, or month. Let's say your average AOV is a hundred dollars and the dashboard tells you 50 percent of the customers that purchased last year purchased again this year, so that customer last year spent a hundred dollars and half of them came back and spent 50, so you could say the lifetime value of that customer is 150. That is a rudimentary baseline pulse, it does not take into account market basket analysis, product-level LTV, or multiple years of a customer being a customer, it only takes into account the last 12 months. The other tool available in Seller Central was just launched in October, called the customer loyalty analytics dashboard, also in brand analytics. It is a step in the right direction, but the layout and UI are confusing at best. It offers a segmented cohort analysis of LTV, this year versus what they think is going to happen next year, using predictive LTV and RFM models. You basically get top-tier clients, promising customers, at-risk customers, and hibernating customers, with detail about what they spent this year and what they think they will spend next year, and it allows you to launch promotions to those cohorts using brand tailored promotions. So it is limited in what you can do with the data, but a little more comprehensive, a cohort-based LTV analysis. These two dashboards can help you, but they still do not give you the full picture. It is a good start.

James Dihardjo: How do they get access to this? Does every seller account with a brand in brand registry get access, or is there something else they have to do?

Alden Wonnell: As far as I have seen, the brand just needs to get access to brand registry. Then for an agency or user to get access, you go to global permissions and user permissions, you have to get access to the brand analytics dashboard in regular permissions, and then the owner has to go to global user permissions and enable all those brand analytics features as well as promotional features like brand tailored promotions. We have not worked with a brand-registered brand that has not had access to it.

James Dihardjo: Now that we have the metric, how do you actually leverage it in your ecommerce business, from a brand perspective?

Alden Wonnell: What we do is a little different, we do not use a third-party tool because three or four years ago we created our own LTV tool, a spreadsheet-based tool, and we are building it into our proprietary dashboard right now. Essentially you download the customer order data and pivot it in a number of ways, look at different cohorts and product-level LTV. It is a manual but productized process that we pull on a regular basis, and we look at it throughout the year and talk to the brand about it. There are insights, certain times of year when certain products sell better or have more repeat purchases, so it makes sense to push those products during those times, so there is a seasonality factor, and pushing best sellers versus accessory items or cross-sells and upsells. When the brand realizes that, they should at least test it, which we typically do, and it usually pans out the right way. We have tried other tools but they have all been missing something, so we created our own.

James Dihardjo: Thank you very much for making time. I think it hopefully keeps fueling that shift in what people are focusing on with their clients.

Alden Wonnell: I really do think it is the next big shift. It is a pleasure as always, thanks for the time and reconnecting.