How Customer Lifetime Value Can Grow Your Amazon Business

What a year 2021 has been!

Not only are Amazon sellers facing short-to-medium term supp[ly chain issues, but there have been impactful structural changes to the Amazon ecosystem that makes selling on Amazon much more competitive heading into 2022.

Some of this comes directly from Amazon – the explicit outlawing of external refunds or discounts, reinforced by the removal of some popular tools that accessed Amazon’s APIs that operated in this area. Moreover, Amazon announced increases in FBA fees, starting in Jan 2022.

However, most of the pressure is external.  

The rise of the Amazon Aggregators has resulted in nearly $12.5bn in capital raised in just under 2 years to buy Amazon FBA businesses to help scale them up. As a result, there’s a wave of deep-pocketed competitors that have enormous resources at their disposal, compared to the typical seller.

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Relatedly, CPCs and ACoS are increasing too. There have been multiple studies on this but this one from Ad Advance shows a 27% increase year-on-year across all ad types with sponsored products now sitting at $1.21 on average for November (pre-Black Friday I should add!).

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More brand metrics are a good start, but still not good enough

It’s clear that sellers quickly need to find a new way to compete. Successful sellers will be the ones who build brands – not just those who sell products on Amazon. However, Amazon’s tools and data for sellers are still centred around products rather than, say, your brand or your customers.

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To give credit to Amazon, there have been a flurry of updates to Brand Analytics and better alignment of Amazon advertising to your brand via attribution and remarketing campaigns for example. Tools like the brand store metrics, the upcoming opportunity explorer tool and the customer engagement tool that allows sellers to send emails to “followers” of your brand when launching new products are all a good start.  

However fundamentally a brand is made up of loyal customers so measuring things at a brand level isn’t granular enough. Things need to be measured at a customer level.

Introducing CLV  

One of the most impactful ways to focus on your customers is to focus on what happens after the first purchase by focusing on your repeat purchase customers to change the economics and cash flow of your business.

For instance, when you work out your breakeven ACoS/RoAS, the default assumption is that someone just buys once from you. What if you knew that on average the number is twice? Well it would mean that your breakeven ACoS would double and you could then spend double what you initially thought on PPC!

The key metrics in all of this are Customer Lifetime Value (CLV) and Customer Acquisition Cost (CAC). Put simply, CLV is the average profit per customer over a time period (say 12 months) and CAC is how much it costs you to acquire a new to brand customer on Amazon. For simplicity this can be all your ad spend for a given ASIN divided the number of new to brand customers who bought that product in that time period.

Let’s look at an example of a customer journey over 12 months starting in January:

Let’s assume that the product sells for $25 and your net profit per unit is $5 after all fees (COGS, shipping, FBA, and yes any promotions!) This customer bought the same product 4 times for a total profit of $20 over the year for an annual CLV of $20. Let’s also assume that in January you spent $1,500 in PPC and acquired 100 new customers who bought this product. This translates to a CAC of $15 which means you’re in a good position!    

It’s worth mentioning that a good CLV doesn’t have to be repeat orders of the same product. It could be an initial purchase of a garlic press that translates to a related product like a peeler or grater for instance. Another example can be if you sell a 30 day supply of supplements, some customers will then buy a 90 day supply further down the line.

In all cases though, this brings us to the fundamental equation:

Also, it’s worth going over what this means for your breakeven ACoS: normally it would be $5 / $25 = 20%. If you’re prepared to wait a year, this shoots up to $20 / $25 = 80% – a 4x increase!

Powerful stuff…

Putting it all to work

So how do you put these insights to work? Glad you asked, here’s a framework:

Step 1: Find ASINs that have a high proportion of overall sales from repeat purchases – anything over 50% would be great. Remember to remove outliers (scarce data, outdated ASINs)

You can use the Repeat Purchase Behaviour report in Brand Analytics to start understanding which products are likely to have a high proportion of sales coming from repeat buyers.

Step 2: Double check the fundamentals for these ASINs such as conversion rates, ratings, reviews, inventory availability, > 90% buybox, category size and growth potential, etc.

Step 3: Rank these ASINs by the gap between CLV and CAC. For example if ASIN A has a 1 year CLV of $20 and a CAC of $11 (i.e. a gap of $9) and ASIN B has a 1 year CLV of $40 and a CAC of $35 (i.e. a gap of $5), prioritize ASIN A.  

Step 4: You can now adjust your ad budget towards these ASINs – you’ll often find that you can afford much more than you initially thought on these ASINs given the strong repeat order potential. You now have the luxury (and comfort) knowing you can generally outspend your competitors if they’re not doing this analysis. This allows you to go after high volume, expensive category (non-branded) search terms that typically would be out of reach (this can help with climbing organic rankings too) to capture new customers who you know will then go on to buy more from you in the future.

Brand Analytics can provide a good starting point to discover high volume category terms that may otherwise be too expensive working off breakeven ACoS/RoAS assumption of only one purchase.

You can also invest more in brand awareness ad campaigns via sponsored brands video or Amazon’s DSP. Don’t forget to remarket via sponsored display and/or DSP to increase the CLV even further!

Again it’s worth mentioning that although it’s easiest if you sell a product that people want to repeat order such as supplements, pet products, health and beauty or cleaning products, it’s still useful to use this process for one-off purchases that can lead to complimentary purchases in the future – as the garlic press example earlier demonstrated.

Here at Nozzle we’ve been using this playbook repeatedly with our customers and we’ve consistently seen increases in both customer retention rates and increases in new-to-brand – it is possible to have both!

There will no doubt be more challenges on the way in 2022 for Amazon sellers but using CLV has shown a very clear and powerful way to compete and win.

Good luck!