How to Calculate Amazon Customer Lifetime Value & Acquisition Cost?

Introduction

In today’s dynamic e-commerce landscape, understanding customer behavior and their value to your business is paramount. 

Amazon, the e-commerce giant, is renowned not only for its vast marketplace but also for its mastery in leveraging customer data to drive growth. A key metric in this data driven strategy is Customer Lifetime Value (CLTV). 

In this blog post, we investigate the significance of Amazon Customer Lifetime Value (CLTV) for sellers, explore how it’s calculated, and uncover strategies to optimize and maximize this key performance indicator for sustainable business success. 

What is Customer Lifetime Value (CLTV)? 

CLTV, or Customer Lifetime Value, estimates the total value a customer generates for a business during their buying journey. For example, if a product's average order value is $5, and the customer buys it 3 times in 1 year, then the CLTV of that customer is $15. 

As selling on Amazon gets more and more expensive over time, it is important for sellers to focus on increasing CLTV. A high CLTV justifies the company's high marketing costs (discussed later in this post).  

Why Do Sellers Need to Know Amazon CLTV?

CLTV is a business growth metric that helps you gain insights into customer interests. It helps you understand what products customers are chasing so you can refine your product catalog and existing touchpoints. Here are a few reasons why you must know about CLTV:

Strategic decision making

The 80-20 rule applies to all businesses. 80% of the sales come from 20% of customer segments. Knowing CLTV tells sellers which customers are most valuable to their business. With this knowledge, Amazon sellers can tailor their marketing efforts and allocate resources more efficiently.

Retention focus

Acquiring new customers is undoubtedly crucial, but retaining existing ones can be even more lucrative. CLTV helps identify high-value customers by calculating the total revenue you expect to generate from individual customers throughout their lifetimes. This allows sellers to pinpoint the most profitable customers, prioritize customer retention strategies, and foster long-term relationships.

Personalization opportunities

By understanding the preferences and purchasing patterns of high CLTV customers, sellers can customize product detail pages and marketing language to attract similar ones. This will help them speak to their potential buyers, enhancing customer satisfaction and loyalty.

What Impacts Customer Lifetime Value?

Customer Lifetime value depends on the following parameters:  

1. Retention Rate: The percentage of customers who continue to engage with Amazon over time. 

2. Purchase Frequency: The number of times a customer buys your product on Amazon. 

3. Average Order Value (AOV): The average amount spent by a customer in each transaction. 

4. Customer Acquisition Cost (CAC): The cost incurred in acquiring new customers.

How to Calculate Customer Lifetime Value?

Amazon employs sophisticated methodologies to compute CLTV accurately, leveraging data analytics and machine learning algorithms. One such approach is the RFM (Recency, Frequency, Monetary) analysis, which segments customers based on their transactional behavior. 

We have listed the segregation (based on behaviors) for you below: 

Recency: How recently did the customer make a purchase? 

Frequency: How often does a customer make purchases? 

Monetary: The total monetary value of a customer's purchase.

Calculation of CLTV

You can calculate customer lifetime value using the Amazon Fulfilled Shipments report. 

Select the same time period to download all reports.  

Step 1. 

Calculate Average Purchase Frequency: To determine the average purchase frequency rate for a product, divide the total number of unique orders by the number of unique customers within the same period. This calculation provides the average number of times each customer purchased from you during that timeframe. Below is the formula for calculating Average Purchase Frequency.

Step 2.

Calculate Average Order Value (AOV): The total revenue generated from all purchases divided by the number of purchases made over a specific period of time gives you the average purchase value, which will help you understand the customer’s average spending ability. Below is the formula for calculating average order value.

Step 3.

Calculate Average Customer Value: Multiply the average purchase value by the average purchase frequency rate to obtain the average customer value. This will tell you how valuable each customer is based on the revenue they bring to your brand/product.

Using this, you can come up with effective marketing strategies and know what the customers’ purchasing habits are, helping you curate more personalized experiences. 

Step 4.

Calculate CLTV: To calculate CLTV, multiply the average customer value by the customer lifespan to arrive at the CLTV.

Once you have figured out the CLTV, the next step is to understand how this can be used to drive sales optimally in your brand’s favor.

Strategies to Optimize CLTV on Amazon 

Customer Lifetime Value provides plenty of insights into how your products perform on the retail platform and which type of product brings in more revenue. Using this data to analyze and optimize customer experience is critical to ensure a high CLTV. Here are some ways you can do that:

Enhance customer experience

The best way to retain customers and reduce churn rate is by providing a good quality product and exceptional customer service. This will ensure that customers keep coming back to buy your product multiple times.

Subscribe and save

If your product is eligible for subscribe and save, that is a great way to lock in a customer for a longer duration. Rewarding loyal customers with incentives such as discounts, exclusive offers, and reward points can incentivize repeat purchases and increase CLTV.

Cross-selling and upselling

Analyzing customer purchase history to identify opportunities for cross-selling, complementary products, or upselling higher-value items will help maximize the CLTV.

Experiment with different strategies that can work for your product and identify the one that does best. An easy way to do it is to advertise bundles and high AOV items on branded search terms. Customers who find you through branded search terms are already a loyal customer base and hence can be shown higher AOV or bundled products to increase average customer lifetime value.

Segmentation and targeting

Segmenting customers based on purchasing behavior, demographics, and preferences allows for targeted marketing campaigns tailored to specific customer segments, driving higher CLTV. In simple terms, the more you market to the customers who need/want your product, the more likely it is that your product will sell.

Continuous analysis and optimization

Regularly monitor CLTV metrics, adjust strategies, and optimize Amazon ads accordingly. Experiment with different marketing tactics, product offerings, and pricing strategies to continuously optimize CLTV. This becomes vital to ensure you stay in the race and win against your competitors. Outdated tactics might set you back in big ways and cause you to lose your advantage over your competitors.  

| Related Read: Amazon Competitor Analysis: A Complete Guide to Outsmart Your Rivals

Challenges and Consideration

While Amazon excels in harnessing CLTV insights, several challenges persist. Despite cracking great strategies through the several optimization options available across platforms, a few concerns listed below should be carefully tread over: 

• Data Privacy: As Amazon collects vast amounts of customer data, ensuring data privacy and security remains paramount and sometimes can be a challenge.  

• Marketplace Dynamics: Amazon operates in a dynamic marketplace with evolving consumer preferences and competitive landscapes, necessitating continuous adaptation and innovation. 

• Measurement Accuracy: Despite sophisticated methodologies, accurately measuring CLTV remains a complex endeavor, influenced by various factors such as seasonality, external economic factors, and customer sentiment. 

Now, you know all about customer lifetime value, but how do you know how much CLTV value is good and how much is bad?

CLTV is seldom measured in isolation. Usually, CLTV is measured along with another metric, Customer Acquisition Cost (CAC).

What is CAC? How is it related to Amazon’s Customer Lifetime Value?

CAC represents the cost a brand incurs to acquire a new customer. It measures the efficiency and effectiveness of a brand’s marketing and sales efforts in attracting new customers. CAC focuses on the upfront expenses of acquiring customers, such as advertising, marketing campaigns, sales team salaries, and promotional activities. 

These key metrics, CAC and CLTV, are measured together to get a complete picture of a company's profit margin. The average CLTV to CAC ratio is 3:1, which means that for every $1 spent to acquire a new customer, a company must aim to earn 3x the revenue over the customer's lifetime.

Let’s dive deeper into the relationship between CAC and CLTV:

CAC vs. CLTV

Ideally, a company wants the CLTV to be significantly higher than the CAC. If the CLTV exceeds the CAC, it means that the company is generating more revenue from each customer than it costs to acquire them.

The first scenario indicates that the company's customer acquisition efforts are profitable and sustainable in the long term. It implies that the business is not only recovering the costs associated with acquiring customers but also generating a positive Return On Investment (ROI). 

In the context of Amazon, where the company operates on a massive scale across various product categories and services, optimizing both CAC and CLTV is crucial for maintaining profitability and driving sustainable growth. 

While CAC focuses on the cost of acquiring customers, CLTV looks at the long-term value those customers bring to the business. By comparing CAC to CLTV, companies like Amazon can assess the effectiveness of their customer acquisition strategies and ensure that they are acquiring customers at a sustainable cost relative to the value those customers generate over their lifetime. 

By understanding the lifetime value of each customer and implementing strategies to optimize CLTV, Amazon sellers can drive sustainable growth, foster customer loyalty, and stay ahead in the competitive e-commerce landscape. Remember, in the world of Amazon, focusing on building long-term relationships with customers is key to unlocking the full potential of your business. 

To effectively manage these metrics and optimize your advertising strategies, consider leveraging atom11, an advanced Amazon PPC optimization software. Atom11 provides tools that help you analyze customer behavior and optimize both CLTV and CAC, ensuring that your investments are yielding profitable returns. Ready to unlock the full potential of your Amazon business? Book a demo with atom11 today and start optimizing for success.

Frequently Asked Questions

What is Amazon Customer Lifetime Value?

Amazon Customer Lifetime Value (CLTV) is the total revenue generated by an Amazon business from an individual customer throughout their lifetime. It is a key performance metric that provides insights into customer retention and helps you make informed decisions.

What is the CAC of Amazon?

CAC or Customer Acquisition Cost is a metric that calculates the total cost incurred in acquiring a customer, including Amazon platform or agency fees. With the CAC and CLTV ratio, Amazon brands can measure profitability and make strategic decisions.

What is a good CLV?

CLV, or CLTV, should be at least three times the CAC for most businesses. This indicates that the amount you are earning throughout a customer’s lifetime is more than the cost incurred in acquiring them. Also, it tells you that the money spent on customer acquisition is actually growing your customer base.