At first glance, return on investment (ROI) might seem like a simple enough calculation. It breaks down the cost that goes into marketing for and running an online store versus the amount that comes back because of that investment. It’s a widely-accepted tenet of business that tracking ROI is a good starting benchmark for measuring financial health, and for good reason. The generally accepted formula is (Dollars in Revenue)/ (Dollars Spent) – 1.
This ratio is one piece of a bigger puzzle that must also consider the value that a company derives from obtaining and keeping customers. To truly take stock of how your e-commerce shop is performing, it’s worthwhile to delve into a richer idea of what ROI can mean from different angles.
Who’s Spending and How Much?
To put it plainly: not all customers are created equal. Looking at how many people are entering your site and converting because of your advertising and sales efforts is important. But your business’s relationship with customers runs much deeper, and your ROI calculations should reflect this. Track the number of leads you’re getting and their purchasing habits to assign them a worth value, and use this to shape your marketing efforts toward these “best clients” in the future. According to a Hubspot statistic cited on LinkedIn, these high-worth customers spend about 30 times more than an average customer.
In other words, it’s time to wrap your head around a three-letter word besides ROI, and that’s CLV. Customer lifetime value shows “how much your customers spend, how often they spend it, and what programs and perks inspire those buyers to become regular customers.” Sounds quite useful for developing a long-term strategy to retain customers, doesn’t it? Here’s how it’s calculated: (Average Order Value) x (Number of Repeat Sales) x (Average Retention Time). That’s a simplified version, but the overarching point is that quality of customer and how long they stay with your business is instrumental in affecting your ROI beyond their basic short-term transactions. Once you figure out how to calculate a meaningful CLV for your purposes, you can update your ROI equation to reflect them: (CLV)/(Ad Spend)-1.
One concrete action that your online store can take to favorably affect CLV is to simply offer a better customer experience all around. KISSmetrics claims that just a 5 percent increase in customer retention can increase profits by 25 to 95 percent. Once you get a customer to your e-store, are they finding what they originally came for? Are they returning throughout the year to make future purchases, thus establishing loyalty with your company based on what you’re doing right? Are there any blatant drop-off points that you can smooth out to make shoppers’ experience more positive?
It’s always a prudent time to examine how ecommerce enterprise platforms affect the customer experience that in turn influence the CLV. Platforms that can’t provide mobile usability, fast page load times, site traffic accommodations, intuitive product filtering, and other key factors are only going to become a drain on your ROI over time.
Since ROI is a ratio, one of the downfalls is that it often does not tell the whole story. Daniel Kehrer, Vice President of Marketing at MarketShare, reminds us in his Forbes column that “focusing solely on dollars-in (“I”) compared to dollars-out (“R”) ignores a complex web of interactions that happen in between. Only by analyzing as many of these intermediate processes as possible can we gain insights into what’s working and what’s not, and alter allocations to achieve better results.”
In conclusion, it’s important to keep an eye on ROI, but also to consider CLV and less tangible marketing progress like brand building when you’re evaluating how your ecommerce store is doing and what you should be adjusting. It’s not just about funneling money into high-ROI channels; it’s about creating a robust, multi-faceted sales strategy that establishes you as a key player for the long run.