Optimize Customer Lifetime Value – NOT Conversion Rates with Valentin Radu




Valentin Radu 0:00
So, now, the the overview is like this conversion rate can be a misleading metric in E commerce and revenue per visitor is more relevant in E commerce. But sometimes when you improve the conversion rate that goes up, the CRO expert or the agency can be happy about the company can lose money. And that’s clear why because if you sell the suboptimal products, which are having a lower margin, and if you improve the conversion rate, may the company can not be profitable.

Valentin Radu 0:44
Hello, there, I’m Valentina Rado, and welcome to my session. Today I’m going to speak with you about the transition from conversion rate optimisation to customer value optimization. To set the stage a bit, I’ve been spending 12 years doing conversion rate optimisation. If I’m going to look behind, I was pushing these kinds of testimonials to my first ecommerce company, which I’ve co founded back in 2006. So we were struggling with the ad costs, and we considered let’s do something different to improve the conversion rate. And we’ve decided, let’s bring this type of geo located, testimonials. Those were for real. But of course, the photos were fake. However, this initiative delivered results. So basically, if you were from a specific city from our country, our beautiful country, Romania, which is bordering Ukraine, yep, peace to everyone, we managed to increase the conversion rates. So basically, if you were from Russia, or from T misura, or from Constanza, you’ve been able to trust our company more. So that was the reasoning behind so mainly after that, we’ve changed a lot the website. So we’ve started to trigger other stuff of other types of experiments like be dynamic discounts based on the car price and on the car maker, right. So if you owned a truck, the price would be would have been different. And then we’ve made some homepage radical redesign. And then we’ve changed the form where you’ve inserted your your data with instant gratification, and we’ve made our own exit overlays. However, these kinds of things helped us to get to a 60% uplift in the conversion rate. So that was a fantastic result, which made me realize you know what, there are many other companies willing to do the same things that I am doing. So that turned out to be the ancestor of Omniconvert. So that technology that we’ve built in house turned out to be developed further and further and something after a few 1000s of lines of code, and after nine years in the making, we’ve we’ve built explorer, right? So Omniconvert is now a suite for E commerce companies. It’s it’s a conversion rate optimisation tool, we have surveys, AB testing, website, personalization, and so on. If we look at the results, it’s clear that we are making something good. So we, as you can see our rating, it’s all competing, Optimizely is and VWOs and Kibo X Monetate. Despite the fact that we are, we have a way less capital that we raised. We’ve worked with a lot of companies, we’ve understood the mechanics of conversion rate optimisation. And at some point, we realized, you know what, let’s look at the performers. So since 2014, we’ve got more than 20,000 websites, this is actually an outdated stat, but I haven’t got enough time to change it. So we we had also access to more than 60,000 A B testing experiments. And what we learned is that the companies that are moving the needle dramatically, are using qualitative and quantitative data as well. And they are starting to see results after they deployed at least 10 experiments. So it’s habit forming for companies as for people, right, so if you go to the gym every now and then eventually you will you will become fit. So that happens with the companies which are moving dramatically the needle. So that put in context, if we look at the other ones, the most companies gave up after a single experiment, the ones that truly succeeded, as I said, they are deploying more experiments. And one other finding was that only one out of five experiments is the winning experiment. However, after a few years in the making, there is this fatigue, right? So it’s, I call it the experimentation fatigue. So no matter how cool is the user experience, no matter how great is the design, no matter how purse too easy for you is your copy. And no matter how consistent you are at deploying test there are that you are reaching a plateau. If you are a midsize company or even a large company, you can move the needle dramatically as you used to. So there are some moments when you are getting stuck and talking with one of our customers back in 2017, we realized that they are stuck as well. So they couldn’t move the needle anymore. And our realization was that AB testing is finding the one size that fits all, but not all are feeling to the same experience. So basically, change is happening, right? So the assumption is what hurts us as you can see in this image over here, so things are changing. And using the same assumptions as in the past is not going to help us move the needle anymore. So

Rommil Santiago 5:51
this is Rommil Santiago from experiment nation. Every week we share interviews with and conference sessions by our favorite conversion rate optimizers from around the world. So if you liked this video, smash that like button and consider subscribing it helps us a bunch. Now back to the episode

Valentin Radu 6:04
that helped us that experience that conversation with our customer, which was being stuck helped us to understand their business more. So we want you to investigate to find out, you know what, but what you are truly needing? Are you after conversion rate? Or what are you after, and I’m going to present you these dominant numbers in E commerce is I’ve understood on my own entrepreneurial skin and by working with dozens of other companies, midsize and large companies in the E commerce space. So we all know that the dominant numbers are this ones, right? So every company out there is after profit, especially now when the economy is changing, and the recession is, is already here. But profit means revenue minus cost, right? But let’s look behind that let’s look at what what’s causing these things to happen. So, if we look one level deeper, we will understand that revenue is actually the number generated by number of customers and by the customer lifetime value. So how much how much how many customers you are bringing, and how much they are spending, right. So basically how much they are spending down the line throughout their entire lifespan. If we look at the customers, we will know that traffic multiplied by the conversion rate, especially in this online game, it’s pretty much clear but if we look at the customer lifetime value, we will identify some other things which are not so obvious. So people are not that interested in these kinds of things like customer retention purchase frequency, average order value and gross margin. Now, if we look even more deeper than that, we will realize that customer retention and purchase frequency is being affected by other things like net promoter score, so meaning the customer experience then everage days between a transaction so how many days are passing between one transaction and to the other, the number of orders and of course the product return rate. If we look on the other part of the spectrum, at the cost every commerce out there are having this type of course these four types of costs, the cogs cost of goods sold the customer acquisition cost the general administrative and r&d right the website development and whatever it is we can see gross margin is the common denominator here this is contributing to the cogs in are also to the customer lifetime value. So this is a very important and dominant number. But if we look below the customer acquisition cost, one mistake that many companies are doing is that they are focusing solely on CPA and ROA s but there are other things to consider like the wages the tool cost the agency fees and the overheads as well. So customer acquisition cost is more important than ROI is because it’s giving you the full picture. So these are the seven dominant numbers in E commerce Traffic Conversion Rate, customer acquisition cost, average order value, gross margin, purchase frequency and customer lifetime value depending on the business model, some are more important than the others depending on the knowledge of the optimizer and of the marketer or the business leader. They are focusing on the first four, maybe first five, but few people are are focusing on purchase frequency and customer lifetime value. I’ve been drawing my mouth since 2017, about this topic about customer retention, customer lifetime value, customer journey, customer experience and so on. So basically I’ve made a lot of discussions, conversations, research towards how to improve customer lifetime value until I had this aha moment. Right. So customer lifetime value truly, truly matters. So I’ve worked with that company. Remember that from 2017. They were a large shoe retailer in Central and Eastern Europe and they were facing fierce competition. And also they were willing to spend a lot of money on TV campaigns because they wanted to keep their customers Now, conversion rate means two things, new customer acquisition rate and the customer retention rate. There is a, there is a mistake over here and I can fix it. So I’m going to just pass over as it is if nothing happened, right? That’s the attitude. So what we realized by working with them is that Google Analytics wasn’t enough for us to give us a clearer picture about the customer behavior, not about the visitor behavior. So that’s why we’ve started to do online surveys to understand what’s going on. But the and then we we’ve decided to go deeper into their SQL and to do some clustering to do some segmentation about their customers. And that led us to do RFM segmentation. So after using this type of methods, we we’ve had an aha moment, and we’ve hit the jackpot. RFM truly matters. And it’s very, very important for any commerce company, that, that that’s giving enough customers, and it’s most important for car companies, which are in certain industries, like fast moving consumer goods, grocery, retail food, everywhere, where the purchase frequency is high enough. So focusing a bit about are on RFM. RFM stands for recency, frequency, and monetary value. So instead of looking at all the customers the same, you split them according to their recency scores, their frequency scores and their monetary score. So basically, you answer to these questions how recently did the customer purchase and if he purchased very, very soon, very, very recently, they you give him give him or her a high score in terms of the reasons on the frequency as well, the, the more frequency, the better, the higher monetary value, the better. So let me explain you how it works. So let’s say we cluster this type of customers, and we have new passions, as we call them, right. So they place a single order, so their recency score is high, their frequency score is low, and their monetary score is high, right. So they have the highest revenue despite the fact that they placed on a single order, and they are pretty recent customers right? After 40 days, most of them will not buy again, some of them will place another order and they will turn into potential lovers. And some of them will place two orders and they will turn into lovers right. After 90 days, some of them will not do anything 70% of them, some of them will will not place another order despite the fact that they’ve placed another one in the first 30 days 15% of them will place another order and they will be come lovers and 5% of them will turn into soulmates now, after six months, let’s say 65% of them will turn into don’t wants like one night standards, they had a lot of potential, but they haven’t made anything after that. So that’s why we call them the don’t wants right? Then ex lovers will be the ex lovers like this, like the name says right. So they will not place another order despite the fact that they’ve placed one plus two plus two, five orders, then the lovers will place another order while the soulmates will still be there with five or six orders. So basically does the dynamic with the adjustments that you can consider because depending on what the company is selling, the data should be different. So not 30 days, maybe 20 days, maybe 60 days, but the behavior is pretty much the same. Some customers are better than the other and the best customers out there we call them the soulmates the the ones that bought the most. So basically, in this real example 3% of the customers generated 12% of the of the revenue and they have the highest recency score, the highest frequency score and the highest monetary score. Now, as you can see over here, the chances to place the next order are growing is are going down the chances to place the next order are higher is not the number of orders is going up. So, the more orders your placing, the more chances you play, you have to place another order as in this example from the first order to the second, the chances are 23.6% from the second to the fourth or 48%. So 61% higher from the fourth to the fourth, there are 47% So the more occurrences of the orders, the more easy is the habit to kick in for the customers and basically you also need to realize when they these orders are being placed. So after one order.

Valentin Radu 14:43
After the first order after 24 days, the chances are 80% After one return 90 free days, the chances are only 20%. So you need to take into account both the recency and the frequency. So in order to improve this, you need to be under In the qualitative and the quantitative data, so that’s exactly what we did with that customer. We’ve blended the qualitative research with the quantitative data. And that led to some initiatives. So we optimize their product assortment, we improve their acquisition by focusing on their best customers, because we realize, and they realized as well that their best customers were not from big cities, but they were coming their soulmate, they were coming from smaller cities, so less than 40,000 inhabitants because they weren’t having shopping malls in their cities. And that’s why they prefer to buy online from their store. So that that being said, that dramatically improved their marketing. So it was an impact not only on the website, but on the whole marketing game. And that also led to them orchestrating different email campaigns, according to the customer segments, because relevance is the name of the game. So in order to move the needle, you need first to be relevant. And that also led to website personalization, according to the RFM segment. So six months later, we managed to achieve a 30% uplift in the customer retention rate. And that was fantastic. Because the new customers were having 40% We’re returning at 40% more. With a 40% more rate, if you know

Rommil Santiago 16:19
any conversion rate optimizers, or growth experts you’d like to see on our show, let us know at guests at experiment nation.com. So basically,

Valentin Radu 16:27
that helped us to understand that it’s time to turn the army convert ship towards customer value optimization. So from the this remote island because back in 2017 2018, not too many people were talking about conversion rate, as they are talking right now. And that helped us to realize that this is the promised land of customer value optimization because our customers need more than just optimizing the website. And that turned out into building other solutions. So at this moment, our solutions look like this. We capture first party data then from any commerce or data source, right. So it can be from any commerce platform or from a data lake or it doesn’t matter, then we process the data. And we build automatically this RFM segments that are dynamically changing according to the customer behavior. And it’s allowing the merchants to understand these key metrics. But also these are fantastic for optimizer, the optimizer because that those are crucial metrics. When you want to understand the customer behavior. Then once you process the data, you generate actions and automations in order to improve the customer lifetime value. So you where you can build audiences in Omniconvert reveal. And then you can push this kind of data with the various automations to add tools to run customer ad campaigns or look alike campaigns to acquire customers like the best ones, you you push these to email tools such as clay vo you push this to Omniconvert Explorer to so that we can run NPS surveys and web personalize the website to SMS tools or to customer support tools or customer loyalty tools. So basically, it all starts with the relationship between the customer and the company. So that also led to for to us understanding the CVO methodology. And let me see if I can yep, I can do this. So the CBO methodology is what we’ve put together. So it all starts with monitoring what matters, customer acquisition cost, customer lifetime value, NPS and whatever. So these are customer centric metrics, then we prioritize the CVO activities by using the E commerce growth formula is basically calculating the impact of various things from the dominant numbers. So if we would be increasing the Traffic Conversion Rate, customer retention purchase frequency by 20%, what’s going to happen with that business, then you do RFM segmentation. So you cluster car customers, and you get insights about which are the best and the most valuable customers, what makes them buy, what makes them come back what stops them from coming back and so on. With the qualitative research, which is crucial, you understand the why behind this behavior. So we you are doing NPS, online surveys, jobs to be done interviews, chat transcripts, and whatever. So you dig into what the customers are actually saying, to understand their jobs to be done their reasons, and their frictions. That stop them from from buying again, just a second because I’m freezing here. There were 40 degrees yesterday here in Bucharest, so you can’t imagine. Alright, so after doing this, you end up understanding who’s the ideal customer profile so who are the best customers and then you analyze their buying patterns based on the brands, categories, cities and locations. Where are the most sticky customers coming from? What kind of products they are buying, what kinds of categories basically analyzing the car customer lifetime value and the RFM segments based on these different variables. And after that with this type of insights, we, we end up doing a customer journey mapping and fixing what’s broken because many times the job of a customer value optimization expert is to fix what’s broken. Despite the website and the above marketing, right. It’s about improving customer service, optimizing the product assortment, eliminating all sorts of friction. So mainly after that there is the CVO strategy. So after fixing what’s broken, the next step is the ongoing optimization, which requires this type of steps, acquisition, conversion, onboarding, prevention and reactivation via all these, all these channels. So mainly, we’ve tweaked this methodology, and we’ve applied it to more than 14 different customers that we worked really closely with, with to nail down the best methodology out there. So now, the the overview is like this conversion rate can be a misleading metric in E commerce and revenue per visitor is more relevant in E commerce. But sometimes when you improve the conversion rate that goes up, the CRO expert, or the agency can be happy, but the company can lose money. And that’s clear why because if you sell the suboptimal products, which are having a lower margin, and if you improve the conversion rate, may the company can not be profitable. And that’s why it’s mandatory to monitor other things which are more impactful like customer lifetime value versus customer acquisition costs. This is mandatory to monitor and and to understand is this is one of the main levers of growth. And that means you need to focus on acquisition, conversion, and retention. The consequences if you focus solely on the conversion rate is that you are reaching a plateau after a certain time. So after you get the low hanging fruits, after you go after the big fish, you end up reaching the ceiling. So it becomes too expensive for midsize and large companies to hire and keep so many talented people. And another consequence is that website tweaking is not what the strategic agencies want to do on the long run. So you want to do meaningful and impactful things. And that’s why you need to go beyond the website and many companies are already doing it, we are just articulating that this is around customer value optimization because this is impacting the whole company. So customer value optimization means it starts with as you can see with customer research. So we have the acquisition phase when you behind with the end in mind, with the best messages, the best creatives which are aligned with the jobs to be done by the products that you’re selling, and with the ideal customers that you’re after. So that leads to better targeting better creatives. And a higher ROI is then on the conversion side of things, things to the customer research when you end up improving the user experience, the landing pages and of course the conversion rate. And on the retention side of things. customer research in this approach allows you to do better onboarding, better remarketing and of course improve the customer retention. There are four types of different CBO campaigns. And the effort as you can see on the acquisition campaigns over here is high. But the for the other ones is pretty low if you compare with the acquisition campaigns where you have multiple channels, multiple creatives and so on, but the impact based on the purchase frequency is getting higher as the purchase frequency is higher as well. So for a purchase frequency of 1.2, where you are selling furniture and mattresses that you are buying every part of 3457 years, the impact of the acquisition campaigns is very high. The impact of the onboarding campaigns is medium because you need to have people being pleased so that you reach amplification and word of mouth through them and then the prevention and return reactivation campaigns are having a low effect. Then if you go further at 1.2 to 1.5 purchase frequency, the impact of the acquisition campaigns is high. But the onboarding and the prevention is getting medium on the beauty fitness and apparel. You’ve got the drill right right. So basically, if the purchase frequency is higher, then you should be focusing on other type of campaigns as well. The worst from my experience so far are the reactivation campaigns, especially when you don’t have a huge amount of customers that you’re trying to reactivate, which means that the recency is the most the best indicator. So now with this type of RFM based campaigns, you end up having different approach to different customer segments. So basically, you have the soulmates and the lovers the best customers where the acquisition and prevention campaigns are the ones that you should be doing acquisition in the sense of using the customer data using the insights from your best customers and using them as a look alike audience As to acquire more like the best ones. Then on the new passions, the new customers with the high potential, you do acquisition and onboarding campaigns for the apprentice as well you do

Valentin Radu 25:11
onboarding campaigns for the don’t lose them, the ones which are having a high potential, but they are starting to churn, you do prevention campaigns as well as with the about to dump you, customers and with the lost customers, you do reactivation campaigns with the don’t want ex lovers and breakups. Now, what it’s understood it is the impact of the customer research. So we don’t want the next lovers you get up, you get you get a lot of insights from from them. Now, if you want to learn more about the customer value optimization, we have here a free guide, you can go on the this link, then you can find more about it. So now let me tell you the four reasons why the CRO experts are in the poor position to nail customer value optimization. First of all, they are data driven. Yeah. So you, you already have this type of data driven approach. So you understand that you need to do things in order to, to move some important numbers, and you need to look at the data not always come up with the crazy ideas. Second, they have an experimentation mindset. So they have this approach of let’s say, being rejected or, or dropping the ball and learning from that, because sometimes you win, sometimes you learn, then they know how to blend psychology with copy with data and user experience. So basically, this is an art and you my personal belief is that we should go beyond the website, we should apply these type of things beyond the website itself. And last but not the least, they have an optimization mindset. And at some point, they will need to break the ceiling sooner or later. So maybe that’s in the DNA of an optimizer and that’s why they will go beyond the website sooner or later. So I’m not having that voice. But I can try I have a dream to know do to stop seeing these connected company silos Yep, which are not working together and customer lifetime value measurement and monitoring is going to align those company do silos no more broken customer journeys, no more irrelevant websites, no more suboptimal customer services and short term website weeks and no more boring emails and that that’s the United Kingdom of Seville and we should be going together and that means having optimisation at different level at the product level at the customer experience level at the customer acquisition level because we need to start with the end in mind and at the email marketing level and the agencies of the future will either work with other smart agencies which are nailing down these components either do do those things themselves. So if you are in this game, welcome abroad. If you want to learn more about customer value optimization last year, I’ve teamed up with some fantastic professors like Bob Mazda, which is the pioneer in the jobs to be done methodology with Dennis you which is an artist in their customer acquisition Val Geisler from from CLEVEO. And calculus, which is the most funny person in the whole digital landscape globally. And basically, we’ve put together a fantastic, fantastic program. So as you can see here from lonar Castro, we He’s telling, he’s saying it to himself, right. So he, he learned a lot about how to nail down ecommerce and how to optimize the E commerce game. Now, if you want to learn more about I have a surprise for you, you can use E nation 50 That’s e n a t i o n five zero to get a 50% discount at the CVO Academy. So you can if you are ready to level up your optimization game, I invite you to use discount this discount and to learn more about customer value optimization because it’s going to give you an integrative understanding about what optimization means. And that was it. Thank you for watching the session. If you want to get in touch with me you can find me on LinkedIn and talking a lot about this optimization of the customer lifetime value and other things related to ecommerce or you can write me an email. And yes, thanks a lot for for watching, and all the best from Bucharest.

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Rommil Santiago