When selling your products online, understanding your actual return on investment for eCommerce marketing is the difference between rapidly expanding your business and filing for bankruptcy. Sometimes early success can fade away, and other times it takes a while to build to a critical mass of sales and customers to support your business long term. Every eCommerce business has the goal of creating a sustainable model for consistent growth, and to do that, you need to know what ROI you receive on your digital marketing efforts. It's not always easy to correlate your spend with the results in an accurate way, so let's take a look at the best model to actually determine your ROI!
Finding Your Best Customers
One of the biggest keys to understanding your eCommerce ROI is knowing which customers are going to provide you the most lifetime value. There are several components to figuring out who you should be targeting with your marketing dollars:
- Which customers are more likely to purchase from you: organic traffic or paid traffic? If your organic traffic customers are buying more often, then spending money on inbound marketing will help improve your organic traffic and reach more of those customers. If more of your customers come through paid search, then investing more into PPC can be the key to finding more customers.
- What is the average retention time for your product? If you're selling affordable sunglasses, then people might buy them every two months, but you need to sell a lot of them to do well. If you're selling high-end furniture, it could be years before they are ready to buy again, but you have a much higher dollar amount per sale.
- How many return purchases do you get? Do people often come back and re-buy from you, or are you constantly looking to acquire new customers because your repeat sales are so low? Do they not need to buy from you again, or are you not marketing well enough to bring them back?
Once you can answer these questions, you should be able to understand who your best customer is, and the best method to reach them. From there you can start making calculations to understand their lifetime value.
Calculating the Lifetime Value
According to RJMetrics, your best customers spend 30x above average. Finding and marketing to them is another key to calculating your ROI and maximizing the value of each customer. It's too simplistic to calculate your ROI simply on first transactions, because that doesn't take into account all the information we just discovered about the best customers, how they shop, and how often they will buy again. When you include those factors, you can calculate the lifetime value of a customer.
We'll use an affordable sunglasses ecommerce site as an example, and start with the average sale:
Average sale = $20
Number of purchases per year = 4
Average retention of customer = 3 years
(20) * (4) * (3) = $240
For our sunglasses brand, the average lifetime value (LTV) is $240, which means they have lots of room for discounts, promotions, and other ways to entice a customer to make their first purchase, because they will make up that money in repeat purchases. When I worked for a large hotel chain, management told us that each of their preferred guests in the loyalty program had a lifetime value over a million dollars! Obviously, a smaller eCommerce LTV isn't going to be seven figures, but the point is that calculating that lifetime value helps you understand what you can spend to acquire them and still be profitable in the long run.
Gotta Spend Money To Make Money
So once you understand your ideal customer, and their lifetime value, you can choose the most appropriate digital marketing tools to help you attract and convert them. This is the fun part, where you get to create the marketing mix that attracts the right clients and unlock the formula that leads to consistent and repeatable results. Some of the main options include:
- Paid Search: finding target keywords to create ads around on Google, Yahoo!, and Bing helps get your name above your competition and claim some of the 70% of traffic that goes to the top 3 results in any Google search. This is a high risk, high reward tool that can backfire if you don't know what you're doing, or provide considerable traffic, leads, and sales when optimized correctly.
- Paid Social Advertising: While similar to paid search, this utilizes behavioral patterns and interests to help put your ads in front of potential buyers. There is the risk of flushing your money away if you aren't targeting the right people, so it's better to start small and build a sustainable model. Likes and shares are great, but you need clicks and purchases more than anything else.
- Inbound Marketing: This includes content like blogs and ebooks, search engine optimization (both on and off your site), social media, email marketing, and other non-interruptive types of digital marketing that help draw the right customers to you without spamming them with promotional garbage they don't care about. Inbound can take some time to get going, but once all the pieces are in place, it can be very cost-effective.
Compare and contrast the quality and quantity of customers acquired through different marketing mediums and you'll be able to see where you can get the most ROI. Maybe customers that find you organically are more likely to purchase from you again, whereas customers you get through paid search buy once and often times never again. In that scenario, investing more into inbound marketing to bolster your organic traffic would go a long way towards creating real eCommerce marketing ROI.
eCommerce is a constantly changing battlefield. With so many major retailers and avenues to market to customers, there can be a domino effect of adjustments whenever the industry shifts. Your single goal should be finding the marketing mix that brings in the most of your ideal customer and maximizes their lifetime value. Once you've done that, you'll have a repeatable formula to consistently drive results and sales in the short and long term.