Want to improve your customers’ lifetime value? Then you need to acquire better customers.
In my last post I talked about what drives Customer Lifetime Value (LTV). As marketers we spend a lot of time thinking up ways to increase LTV after the customer buys–email, SMS, and other outreach strategies. But we’re focusing on the wrong end of the purchase journey, because 75% of LTV potential is already baked in before a customer makes their first purchase with you.
75% of a customer’s LTV potential is set in stone before their first interaction w/your brand:— Alex (@heyitsalexP) January 4, 2022
1. Their disposable income
2. Your category’s buying cycle
3. How the customer prioritizes your category
If you want to boost LTV, acquire better customers.
So what is the most effective way to improve customer LTV? Acquire customers with more LTV potential. Here are a few ways you can do that.
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Why Do Some Customers Become Better Than Others?
The number one determinant of LTV potential is disposable income, hands down. Unless you manage to reach the pinnacle of brand desirability, no one is going to forgo a meal to make their second purchase with you.
The median annual salary in the United States is about $42,000, while the average annual salary is $56,310. That average is pulled up by high-earning outliers at the top of the distribution. So what does this mean in terms of spending power?
If you’re earning between $42-56K, you’re taking home between $1-1.5K every two weeks, depending on the tax rate in your area. For most Americans the first paycheck is eaten up by expenses like rent, insurance, debt service and utilities. That leaves around a thousand dollars, or $250 per week, to cover all other expenses, including keeping yourself fed, clothed and clean.
This customer, who represents more than 50% of the US consumer base, does not have a ton of cash sitting around to purchase a new $50 skin cream or scented candle. If they do make a purchase from you, it’s going to be a one-off purchase, likely made at a discount.
If you want to find consumers with repeat purchase potential, you need to target higher earners. One problem: income typically increases with age, but so do expenses. When you layer in children, mortgage payments, and post-grad education, disposable income doesn’t increase proportionally with salary over time.
So the market with the highest LTV potential is always going to be high earners between 40-65. By this time many of those additional expenses have leveled out. Of course, there are outliers across the demographic spectrum, but if you want a broad target, this is it.
To put it another way: your best customers are going to be individuals with money to spend and a low expense base. They’re also going to care enough about the category you sell and your brand to make multiple full price purchases. So how do you find these people?
Conducting Research To Acquire Better Customers
The first step to acquire better customers is to learn more about your current best customers. There are two ways to attack this–transaction data analysis and customer research. To get a full picture, you should do both.
Transaction Data Analysis
Subtotal the full price spend, net of returns, for each of your customers who purchased over the past two years. Then find the top 10-20% of spenders and analyze the following:
- What products and categories did they buy in their first purchase, and how does this compare to all first purchases during the last two years?
- How many items, and from how many categories, did they make their initial purchase. How does this compare to all first purchases L2Y?
- What was this cohort’s return rate L2Y vs all buyers L2Y?
- What marketing channels and campaigns acquired these customers, and how does that compare to all customers acquired L2Y?
You’re likely to find that high LTV purchasers:
- Entered through your most expensive category or product line.
- Spent more in the first purchase–either buying from multiple categories or purchasing multiple units.
- Had a higher than average return rate if you sell at a higher price point. If you sell something like shoes or clothing you’ll see “bracketing” behavior.
You’re also likely to uncover some insights specific to your own business. But all of these behaviors are an indicator of purchasing power. He/she spends more than other customers because he/she simply has more money to spend overall.
Surveys can be built out with a tool like Typeform or Google Forms, and administered via your email list. The tricky part is that you can’t control who will respond. But odds are good that at least some of your highest LTV customers will participate. It’s good to have a range of responses from across the LTV spectrum so you can get a sense of how different customers perceive your brand.
Your surveys should have a focal point, because you want to try to limit them to 10 questions to keep the response rate high. Designing a survey is outside of the scope of this pos, but I may cover it in the future. But there are two things I like to include in every survey:
- An open response question that asks “Anything else you’d like to share with us?” This always results in some very interesting findings, and uncovers opportunities you hadn’t thought of previously.
- A request for the audience to include their email and IG handle if they would be open to a follow-up Q&A session. You can use the email to schedule some 5-15m interview calls that you can use to dig into specific questions. This is a great (paid) resource for conducting good customer interviews.
You can use the IG handles for…
“In-Depth” Customer Research
If your brand has been around for a minute, there is probably some internal mythology about who your best customers are. This exercise is helpful in dispelling those myths because it takes a wall of data and “makes it real”.
You’ll take your top 10-15 customers and learn everything you can about them:
- Look at their transaction history. How many shipping addresses have they used with you? Search all of them on Zillow, pull down screenshots and record the “Zestimates”.
- Google their names and email addresses to see what comes up. You can usually find job titles, major accomplishments and charity involvement.
- Check out their IG accounts if public. See what you can infer about their lives–do they have children? Any major hobbies? Favorite vacation destinations.
- Pull a list of everything they’ve purchased in their lifetime. Tally up the total spend and include screenshots of the products.
Use this information to create a visual snapshot of each of your best customers and share it with leadership, along with the insights you found from the surveys and transaction analysis. This can lead to some “interesting” conversations, so tread lightly. At one former employer our owner decided to completely reposition the brand after learning more about our top customers.
Also–I acknowledge that this is essentially stalking.
Tactics For Acquiring Better Customers
Now you know all about your best customers, but what can you do with that information? The answer: go out and find more VIPs like the ones you’ve got. A lot of advertising and marketing strategies optimize for the average customer. But you need to create swim lanes dedicated to what works for the high potential customer.
Create Funnels For Your Higher Priced Items/Categories
The general consensus re: Facebook/IG ads is that you should “go broad” and let Facebook’s algo decide what part of your assortment to serve to what audience. I agree with this…mostly.
But what often happens, especially if you have a really broad assortment, is that you wind up selling lower-priced items to more casual customers because there are more of them. The algo is driven by its own goals (maximize return), not your goals (seek out a specific audience).
Definitely continue to run broad if it works for you, but carve out budget to test into a full funnel that works for the high end of your assortment. This may require lookalike audiences, custom creative and custom landing pages. It’s also likely to require some testing and iteration. But if you nail this, you’ll have a profitable pipeline of future VIPs.
Develop Ad Creative For The High HHI Customer
Just going to spit it out: consider selling directly to high net worth women over 40. They have money to spend and fewer hang-ups about spending it.
Represent this customer in your ad creative, and think about her preferences, passions and pain points when you draft copy for your ads.
If all the models and influencers in your ads are keut, white and under 25, you’re probably missing out on converting some potential VIPs. The exception to this advice may be high end fashion, but even luxury brands are experimenting with a more diverse set of campaign stars.
Test Offers That Increase AOV
This doesn’t mean discounts for incremental spend, aka buy one, get one free offers or discounts. Those tactics dilute margin as they increase AOV. What you want to do is think creatively about your offering and think about ways to tweak it that will add value for potential VIPs.
If you sell clothing, you can offer a styling service or the option to order up to 10 pieces and pay only for what you keep. If you sell home decor, bundle “rooms” together as curated by some influential designers, and offer those bundles at a minimal discount. Think about cool gifts with purchase you can offer that convey “insider” status. The possibilities are endless.
Roll Out The Red Carpet Post-Purchase
You don’t need predictive models to identify your highest-potential customers. You can use the outcome of the transaction data analysis. Or simply go with this rule of thumb: customers who make a first purchase at full price and buy more units in more categories than average have higher LTV potential.
Because these customers have higher LTV potential, it’s worth investing a bit in improving the odds that they buy again. Some ideas: follow up with them by phone to get feedback on the first order, create a special post-purchase email series, include a bounce-back offer for a second purchase in their shipment.
“But This Doesn’t Scale!”
You’re absolutely right, this doesn’t scale! And that’s because you’re only targeting about 10-20% of the US working age population. The idea that you can turn all of your customers into your best customers is one of the biggest myths in the marketing world.
If the profitability or long term success of your business depends on turning everyone into a VIP, it isn’t going to work. But developing strategies to consistently acquire better customers will help you create a solid base of profitability and predictable revenue to grow on.
Every customer type has its own role in the growth and success of your business. In a future piece I will cover how to manage your less valuable customers in a way that still drives profitable growth.