One way to analyze acquisition strategy and estimate marketing costs is to calculate the Lifetime value (“LTV”) of a customer. Roughly defined, LTV is the projected revenue that a customer will generate during their lifetime. In this graphic we’ll briefly cover how to calculate LTV and how to use LTV to help solidify your marketing budget.

Case Study: Starbucks

Despite the shaky economy, Starbucks is opening new stores around the world. In 2012, Starbucks expects to open 600 new locations internationally, about 25 percent of which will be in China. It’s no secret that Starbucks’ acquisition strategy is closely scrutinized and routinely copied. Using rough sales figures from 2004, we’re able to estimate the LTV of and average Starbucks customer. The sales data from Starbucks may not reflect current marketing trends, and is only provided to illustrate the steps necessary to calculate LTV.

Step 1: Average Your Variables

• Customer expenditures per visit
• Number of visits per week (the “purchase cycle”)
• Avg. customer value per week (Expenditures x Visits)

Step 2: Calculate Lifetime Value (LTV)

Constants

• The Average Customer Lifespan (how long someone remains a customer). In the case of Starbucks, the average customer lifespan is 20 years.
• Customer Retention Rate. The percentage of customers, who, over a given period of time, repurchase, when compared to an equal and preceding period of time. Starbucks: 75%
• Profit Margin per Customer. 21.3%
• The Rate of Discount. The “rate of discount” is the interest rate used in discounted cash flow analysis to determine the present value of future cash flows. Usually this number falls between 8% and 15%. Starbucks: 10%
• Avg. Gross Margin per Customer Lifespan. Starbucks has a profit margin of 21.3%. If the average customer spends $25,272 during their time as a customer, Starbucks has gross margin per customer lifespan of $5,382.94.

By calculating the LTV of an average customer, Starbucks can now begin to estimate the maximum acquisition cost of a new customer.

Breaking Down LTV Further

LTV Will be Different for Different Kinds of Customers

Step 2 in this graphic is intended to help you determine LTV as a total average (an average of all your customers). To do this, companies will typically average the data from randomly chosen customers (as shown in Step 1 above). Sometimes it’s helpful to break down the average further and perform separate LTV calculations for different kinds of customers. Try and segment your customer base by total purchases over a long time period, and it will help you determine the LTV of “good” customer versus and “average” one. This type of analysis will help you determine how much more you should pay in order to acquire a “good” customer. See chart below.

Investing in “Good” Customers

Companies should be worried about the lasting impact of “buying cheap customers.” How likely are these customers to buy another product, or hang around for a few years? Sometimes it pays to invest in “good” customers. “Good” customers might cost more to acquire, but they’ll likely be more profitable as well.

Let’s say that the LTV of an “average” customer is $8,000, and the LTV of a “good” customer is $10,000. By subtracting the two LTV’s, you can see that you might expect to pay $2,000 more to acquire “good” customers.

Customer Satisfaction Boosts LTV

One of the most effective ways to boost LTV is to increase customer satisfaction. Research has found that a 5% increase in customer retention can increase profits by 25% to 95%. The same study found that it costs six to seven times more to gain a new customer that to keep an existing one.

The success of Starbucks could be attributed to its high customer satisfaction rate (89%, 2002, see below). Survey software such as KISSinsights can help you determine (and improve) your customer satisfaction rate.

If you are a web developer chances are you understand what the internet means to global commerce, and you’ve given thought to how you can get your piece of the pie. Well, I’m here to tell you that as a developer THE way to maximize your potential in the global e-commerce marketplace is Magento Development, and here’s why:

Why E-commerce?

According to the US Department of Commerce in 2010 E-commerce accounted for 46.4% ($2,283 billion) of total shipments in the US, a 21% increase over 2009 and U.S. retail e-commerce sales reached $169 billion. In fact, from 2002 to 2010, retail e-sales increased at an average annual growth rate of 17.9 percent and in 2012 E-commerce sales totaled for $225.5 billion – accounting for 5.2 percent of total retail sales for the year!

Why Magento Development?

With over 138,000 sites using already using Magento, of which 49,000 are of the internet’s top sites, Magento is the easily the world’s favorite e-commerce platform. And with thousands of new sites added each month this is sure to continue to be true. As a developer, however, the reasons to learn Magento development extend beyond simply taking advantage of the vast opportunity the large number of users present. Magento is built open-source so you’ll have ample opportunity to create extensions, add-ons, and plug-ins that can bolster, or even replace your base income. Additionally, the complex nature of Magento – the site is considered one of the hardest to master – means that truly capable Magento development professionals control their own market, and a very lucrative market it is.

Ok, I’m Convinced, Now What?

Lucky for you Magento offers great training opportunities for professionals of all skill levels, and certifications for those that complete the requirements. A great place for developers looking to break into the Magento marketplace to begin is the very popular Fundamentals of Magento Development course. Course attendees will be introduced to the Magento architecture and learn how Magento makes use of MVC, the Zend framework, and OOP to achieve its legendary flexibility in a hands-on environment. Best of all, the 40 hour course is offered completely on-demand, so you don’t even have to leave your couch to attend. For more information about the course please visit our dedicated Fundamentals of Magento Development page.

It’s happened to everyone: You walk into a store expecting to buy something (think coffee shop), see a line and decide that buying there simply wasn’t worth your time, so you left and maybe even bought your coffee at a competitor. That’s shopping cart abandonment in real life. Your shopping cart/checkout page can have the same effect on potential e-shoppers: if it’s a hassle buyers will simply shop elsewhere. The checkout page is quite an important part of any e-commerce store. It plays a major role in , in fact

For the average Joe Storeowner finding the right platform upon which to build an e-commerce site is probably a scary and daunting task; there are just so many options! Currently, at the top of the heap is Magento – the all-in-one e-commerce solution. Let’s take a look at what makes Magento so great, and consider some of the pros and cons of the platform to see if Magento is right for your e-commerce project.

What is Magento?

Magento is a powerful, comprehensive suite of business software. The program was built “open-source” which has led to the growth of a massive community and the plethora of extension, add-ons and applications they’ve created, which are available throughE-commerce Solutions

the Magento Connect marketplace. Magento can be used out of the box but the program is really intended to be customized to your business needs and design specs, and as such it is a complex and nuanced program with a steep learning curve. This means that finding a developer who is capable enough to successfully customize the program without losing some functionality (like the ability to upgrade) can be difficult and WILL be expensive to the point that the platform may really not be cost effective for smaller businesses.

Is Magento the Right E-commerce Solution for You?

Now that you understand what Magento is, how can you differentiate it from its competition and decide if it’s the right platform for your business?

Cost Benefit Analysis

A good analogy for Magento is a racecar: both are very powerful, precisely engineered and fine-tuned, and both are too much machine for the average Joe. Magento, like other high performance apparatuses requires the appropriate tools and capable handlers to keep it running at its peak – or to keep it running at all. Therefore, above all else, it is imperative that you secure a high quality source to host your site, and superior developers, preferably with lots of experience on Magento, to handle any fabrication or integration. All this means that if your site is smaller – a $1 million yearly turnover is a good yardstick – Magento is most likely going to be too expensive for you. The good news is that these are basically the only downsides of Magento, and if you can get the right developer to handle your project and your business can afford it, then Magento is a superb system with an amazing set of features. 

What Does Magento Offer Users?

In addition to the most comprehensive suite of business software available in one package, Magento offers users all the basic necessities and e-commerce requirements like professional design, great security, and customer service. And the massive community of users means that finding answers to your questions or issues is almost a certainty. Add Built-in SEO optimization and marketing tools and industry leading product management to that and it’s instantly clear why Magento is so popular. However, perhaps the strongest selling points for Magento is that it is infinitely customizable, offering users almost endless design possibilities, and that it’s integrate-able with the vast majority of third-party business applications – think Google Checkout – making it the ideal e-commerce solution upgrade for companies with existing platforms already in place.

Communication integrity is an issue humanity has grappled with for as long as there has been communication. The challenge is simple – sending a message over any distance means exposing that message to risk – the message carrier could, willingly or by accident, give the message to the wrong person, or the message could be taken from him by force, etc. Man, over the years, has employed various strategies to combat this issue: seals, signet rings and cyphers are a few. With the advent of computing and the digital age these techniques, unfortunately, became obsolete and a new protocol was necessary. That where Magento SSL certificates came in.

Secure sockets layer (SSL) technology (or its successor transport layer security, TSL) has, at its most simple, two main applications: to confirm that the message recipient is who they claim to be and to guarantee the message is received unchanged or unmolested. To achieve these goals SSL uses cryptography to create a secure channel between two remote computers, like a web browser and web server or between you and your bank, through which communication can be sent, and which, in conjunction with high level encryption, ensures confidentiality and message integrity. And SSL accomplishes this with almost no burden on servers and because SSL runs entirely in the background there’s no experience change for visitors (beyond seeing the HTTPS and padlock icons that are shown in the image below).

Who needs Magento SSL certificates?

The short answer: every website that handles customer data, and any business that uses email or has remote locations. SSL certificates are cheap enough, between $300 and $600 per year, that not taking advantage of their availability is needless, foolhardy and arguably criminal. Additionally, studies have shown a strong correlation between the presence of an SSL certificate and increases in conversions, with some in the industry claiming increases as high as 15%. The bottom line is that the cost to benefit ratio is skewed so far in favor of having an SSL certificate, even it only functions as a placebo, that you to not have one would be, simply put, stupid.

What types of SSL certificates are there?

SSL certificates are available in three basic website validation tiers: domain, organization and extended validation, each with a different level of validation attached. The domain level has the least vetting requirements – demonstrating control of an admin email address is enough – and cost the least $200 per year. The organization SSL requires a far more stringent vetting process, requiring 3^rd party confirmation and some documentation, and costs $300 per year; both of these SSL certificates add the padlock and HTTPS signifiers. The EV level SSL certificate has the most extensive vetting process – in line with the CA/B form guidelines – and the most identity validation, as well as offering the most visibility to users because it adds a green band containing the website’s name and location right to the address bar.

Magento SSL Certificates

Each of these three certificates covers a single domain name, and is available in 1-5 year periods. Alternatively, users can opt for a Wildcard SSL which is issued to *domain.com allowing a single SSL certificate to provide coverage for an unlimited amount of sites. One final option available is acquiring an SSL certificate with Subject Alternative Names (SAN) which allows user to add up to 40 domain or server name variations (e.g. paypal.com vs. www.paypal.com) to their certificate, achieving functionality similar to that of a Wildcard SSL certificate but with a higher level of security, since each name variation is registered in advance.

All of this adds up to something pretty simple: getting a Magento SSL certificate for your e-commerce site is a must, and as a bonus it is also probably the easiest, most cost effective way to raise conversions.

To find out more about Magento SSL certificates from Hara Partners.