We know the three factors we know will improve LTV:
In practice there are an almost endless number of ways you can address each of these. Improving LTV is the infinite game of marketing, with each new project you take on bringing unique challenges, with unique solutions. Reading case studies of the ways talented marketers have grown businesses is one way to come across creative and novel solutions you hadn’t thought of.
For that reason, this section and the Establishment stage in general will be somewhat less prescriptive and systematized than the Dispersal and Recruitment stages. While the previous stages had implementation plans to apply to your own business, this stage necessitates a bit more thought into how you will apply the following strategies.
That being said, combining the following automation strategies with the frameworks we've covered already will arm you with the tools and knowledge necessary to make the right decisions. You’ll be able to look at the power laws inherent to your business, understand the constraints inhibiting your growth, and go about addressing those constraints in a way that makes growth as efficient as possible. Combining this with the foundations built in the previous two stages will be the best possible primer for how to use email marketing automation profitably and sustainably.
Let’s look at some of the strategies for addressing each individual LTV component.
The first way to improve our LTV is by addressing the constraint of Average Order Value (AOV). Increasing AOV means increasing the amount of value exchanged at each purchase. This usually means either purchasing higher quantities of a single product or buying other products in addition to the main purchase.
AOV can broadly be improved by three strategies:
Let’s explore each type in more detail:
We’ve all experienced an upsell at some point: upgrading a hotel room to a superior one, buying a new car model with add-on features, or being convinced to convert a long-haul flight ticket from economy to business.
Upsells increase AOV by offering a more expensive version of the product being purchased. The upsell builds upon the value of the base product — it solves the same problem, but in a slightly more compelling way, thus commanding a higher price. This means it should be perceived by the customer as superior to the base model: it adds additional features, guarantees or other factors which build on the benefits offered by the original product.
The wisdom of upsells lies, again, in the exploitation of the power law distribution inside your customer database. Let’s say each month you sell 100 units of Product X at $100 each, yielding $10,000 revenue with an AOV of $1000.
You introduce a superior version of Product X, priced at $225, offered at the checkout as an upgrade for your customers. Given a conservative industry-wide average of 4% upsell conversion, this results in a 5% increase in revenue to $10,500, and a 5% increase in AOV to $105.
Compounded, this one small addition to this store will yield an additional $6000 revenue each year, a 5% increase. All from introducing one simple upsell product to your power law customers. These are customers who are already willing to hand over that money: the top 20% of your customers who want the option of purchasing a superior product. It takes very little extra work for significant gain - an easy win.
Broadly, the easiest way to build your first upsell offer is by using an existing third party plugin. Here are some common eCommerce solutions and some plugins that work well for each:
A few more things to consider when designing your own upsell for your unique product line:
Cross-sells are often conflated with upsells, but there’s an important difference. While upsells offer a superior version of a product for a higher price, a cross-sell aims to sell an additional product in conjunction with the primary purchase.
An upsell is more like an upgrade, whereas a cross-sell is more like “Do you want fries with that?”. In fact, that’s one of the classic examples of this tactic. The products offered in a successful cross-sell adds to the experience or utility of the main product being purchased. Anything that you can add on to complement the main purchase is a good candidate for a cross-sell. Earbuds to go with your new phone, web hosting for your new domain purchase, or oat milk for your latte.
So why bother implementing cross-sells in your store? Let’s look again at our example, starting with the same conditions:
Now add a cross-sell opportunity at checkout, a complementary product priced at $25. Given a 35% conversion (the same conversion boasted by Amazon), this results in a ~9% increase of AOV to $108.75, and a corresponding ~9% increase in revenue to $10,875.
Looking at the compounded result, this small addition will yield an extra $10,500 revenue over a year, an increase again of ~9%. All from introducing one simple cross-sell product. Again, very little extra work for a decent gain. You get a decent revenue bump and take advantage of yet another opportunity to provide extra value and appear helpful to your customers.
Building cross-sells can be achieved using most of the same plugins covered for upsells. But there are some things to consider when thinking about how to structure cross-sell offers:
Another strategy that combines the benefits of both cross-selling and upselling is Bundling. Bundling incorporates the best features of both: you offer complementary products as in cross-selling, while also convincing the customer to purchase a higher-margin product, as with upselling. The result, as with the others, is improved overall AOV. There are a number of benefits to using a bundling strategy as opposed to simply using cross-sells or upsells on their own.
Firstly, it makes shopping more convenient by reducing choices and providing a customer with everything they need to get maximum value from the product (accessories, add-ons, etc.) and make the transaction more frictionless. For example, if a customer buys a camera they’ll also need to buy specific lenses, batteries, memory cards, cases and straps to get the most out of the product.
Secondly, a bundled offer for a customer seeking to use the camera in a specific way can be a great way to target a customer segment while also taking advantage of cross-sells and upsells. For example, a package targeting “beginner” photographers will save the customer time from having to research or otherwise figure out what they’ll actually need to use the product effectively, providing a valuable service alongside the product itself.
Not only is it a better experience for the customer, it enhances the perceived value of the offer. Using the camera example, bundling these products together allows the store owner to offer a reduced total price while still retaining profitable margins.
There are two main types of bundles you can use - pure and mixed. Broadly, a Pure bundle is when you create a new product that consists of items that cannot be bought individually. Mixed bundles combine several existing individual products into a discounted deal. As a general rule, some studies have found mixed bundles tend to perform slightly better than pure bundles, but both have the same effect of improving AOV.
Consider a camera store making 60 sales per month, split between three different products. Monthly revenue is $20,000, with an AOV of $333 due to the volume of orders being split between lower and higher priced products.
Now let’s assume the store owner identifies a customer segment who is interested in purchasing this particular lens with this camera. The store owner bundles these items and offers them at a slight discount. The price of the bundle shows the customer the other items they may have forgotten they needed, and throwing in a free memory card will “sweeten the deal”.
Instead of selling 25 cameras and hoping this customer segment buys the other components you know they want, by putting together a unique offer combining these products you actually both end up better off.
This means conversions for this bundle are more likely, with the result of a higher AOV for this customer segment. That in turn means the store owner has now improved the LTV for this particular segment. This potentially opens up new marketing opportunities such as paid traffic for this offer, personalizes the customer experience (and subsequent conversions) by creating a tailored offer, stands out against potential competition for a profitable customer segment, while adding more revenue while you’re at it.
Part of the reason bundling is effective is due to an effect known as price anchoring: For the customer who knows they want both the specific lens and the camera itself, they’re more likely to select the bundle you’re offering rather than shopping around. When they compare your bundle, with a cheaper price and additional products with what these items would cost separately, it makes conversion more likely as the added value is clearer.
Here are a few more things to consider when designing your own bundles:
Increasing repeat purchases means your customers come back to buy more than once. The effect of Repeat Purchases is far more dramatic than increasing AOV alone.
Consider again our example:
If you maximize your AOV by 10%, that’s great, as we just saw. But if you can then increase the amount of times that an order takes place, your LTV dramatically and quickly compounds. And it’s the compounding effect of repeat purchases plus increased AOV where we create the most gains in LTV and revenue:
Repeat purchases aren’t just lucrative, they’re also highly effective. It’s significantly easier to sell to existing customers than it is to convert new ones. In fact, after the first purchase, there’s a 32% chance a new customer will transact with your brand again within a year. Compare this to an industry-wide average new customer conversion rate of just 3%.
Not only are they more than ten times more likely to buy than a new customer, this actually improves with each successive purchase. The 2020 Adobe Digital Economy Index reported that a customer who has purchased from your store twice before is then 9 times more likely to convert again than a new customer.
It doesn’t end there: not only are existing customers more likely to buy again, they’re likely to spend more each time they transact. A Bain & Company report titled The Value of Online Customer Loyalty states that after being loyal to a brand for over 30 months, a customer is likely to increase their AOV by around 67%.
The combination of increased AOV with likelihood of repurchase reveals just how valuable existing customers are for your business. Some studies have even revealed these repeat purchases account for more than 40% of total eCommerce revenue, with a mere 5% lift in the number of customers who buy again accounting for between 25% to 90% increase in gross profit.
In fact, the Adobe Digital Economy Index even reports that in many cases, up to 41% of the revenue of an eCommerce store is attributable to just 8% of its customers. What this demonstrates yet again is the prevalence and importance of the power law distribution in your business:
So how exactly do we capitalize on the compounding effects of repeat purchases? As with increasing AOV there are, in theory, countless ways to go about this, only limited by imagination. However, in an email and automation context there are a few best practice strategies we can use to capitalize on those customers who have already purchased.
Let’s cover each of these in a bit more detail:
So it should be clear we need to focus more attention on those subscribers who become customers, but how do we do this? How do we encourage repeat purchases for those who have bought from us once already?
The most straightforward way is by leveraging the data we’ve collected to target specific segments with opportunities to buy again. In the Recruitment stage, we ended by mentioning these once-off campaigns as a great way to implement personalization and increase conversions. These can improve first-time conversions for new customers, in line with the goals of that stage, but they are also effective for improving repeat conversions for existing customers.
By using the data we collected in the Semantic Layer, it’s possible to create highly targeted segments of subscribers with discrete interests. For example, you can create a subscriber search that includes only those who have viewed a certain product or product category, or only those who have engaged with emails within a certain time period. You can target individuals who have opened specific emails, clicked on specific links, or anyone who has abandoned a cart within a specified date range.
You can couple this level of segmentation with timely excuses for discounts and promotions. There are dozens of opportunities to send promotions and discounts throughout the year, some of them specifically suited to exciting certain niches or industries. For example, for one client selling luxury vegan leather products, events such as World Vegan Day are reliable and lucrative calendar dates for the brand. Planning for these types of events, in conjunction with smart segmentation, should be a priority.
It’s difficult to find a better example of the disruption we covered in my Walled Gardens post than tech company Substack. Launched in 2017, Substack is a platform that in their words “make(s) it simple to start a publication that makes money from subscriptions”. The authors writing on the platform build an audience on their own, attracting paying subscribers interested in niche topics the authors serve.
Substack is a perfect example of combining a supply and distribution advantage to disrupt an existing industry. In their own words, Substack writes on their site “The internet has saturated us with an information deluge that has changed the economics of news. No one wants to add more noise to their lives, let alone pay for the privilege. But that is the very reason that the right kind of subscription content can be even more valuable in the digital age … Precisely targeted and curated content means less noise”.
The success of their platform proves their thesis. What the popularity of Substack and similar services proves is people are happy to pay a premium for relevant and niche content. As of writing, Substack now attracts over twelve million visitors per month, with over five hundred thousand active paying subscribers. The audience is massive, and revenue similarly so, with the top ten most popular authors collectively grossing fifteen million dollars annually in subscription fees. This is the Curation Advantage on full display.
What this means for your business is there's a huge opportunity to invest time into sending a newsletter that provides similar curated value. In a 2019 Forbes article titled “Every Company is Now a Media Company”, the author touches on this opportunity, stating that “To stand out in today’s media landscape, companies need to … start investing in high-quality media that uses audience insights and brand advocates to inform, entertain and inspire customer loyalty.”
The benefits of providing timely, relevant value to your subscribers on an ongoing basis isn’t just limited to keeping your brand top of mind or encouraging repeat purchases. It also allows you to grow your subscriber base as new subscribers join your list for the value of your newsletter. You solidify your brand positioning, maintain perception as an authority, and build a brand-matched audience to whom you can then effectively promote products and services.
Not only this, if you really invest time and effort into a newsletter, you can even build a subscription revenue stream of your own, just like the creators on Substack; one that complements your brand and creates traffic flow that’s profitable in itself. Coupling this with other opportunities in this model such as paid endorsements can add significant revenue to your business outside of your core product line.
Another way to improve repeat purchases is by rewarding new customers. Loyalty, rewards, subscriptions or VIP programs are a common and effective way for stores to encourage those who purchase once to come back and do so again. While first time customers are already likely to come back and repurchase, by offering loyalty programs you increase the chances of this happening for both new and existing customers by enhancing incentives to do so.
The immediately obvious benefit is that these loyalty programs build revenue and LTV via repeat purchases. But revenue and LTV aren’t the only benefits to these programs. A well-designed loyalty program can potentially attract brand new customers who aim to benefit from rewards other brands don’t offer, potentially yielding a competitive advantage in your brand’s positioning.
For example, some loyalty programs encourage their users to refer new customers in exchange for discounts. Doing so can turn your existing customers into brand advocates.
A “VIP” program is another effective strategy which uses a clear hierarchy of membership tiers to project an ideal of exclusivity among top customers. Frequent flyer programs or “platinum-level” credit card products are one example of this, dividing participants into classes based on their activity within the program. When branded effectively, VIP programs can be a source of pride for certain customers who will increase repeat purchases just to maintain their place within a top tier of membership.
More general points programs also encourage repeat purchases. Many supermarket chains offer programs that encourage customers to do the majority of their shopping at their chain. In return these typically offer discounts, exclusives, free samples, coupons, or unreleased products to maintain a high LTV and mitigate the potential of lost customers to competitors.
The revenue spent on attractive rewards for loyal customers is more than offset by the compounding effect of repeat purchases (and AOV) on LTV. In fact, certain types of loyalty programs can sometimes be profitable on their own. For example, Amazon’s Prime membership subscription requires customers to pay a yearly fee, which in turn is used to make their rewards even more competitive: free same-day delivery and consistent generous discounts compound to make their platform more desirable for both new and existing customers.
To recap: So far, we’ve determined the biggest constraint to our growth was LTV. The best way to improve this is by improving the sub-constraints of average order value and repeat purchases.
Together, these two factors yield the greatest gains in LTV, helping us in our goal towards leveraging the largest possible gains from those individuals who contribute outsized revenue. We've taken advantage of the power laws underlying the structure of our email ecosystem.
With LTV addressed, it's now time to reapply the Law of the Minimum to uncover where we should focus our attention next. We look back to the constraints of Traffic, Conversion and LTV.
Having addressed Conversions in Recruitment and LTV, at this point our total revenue is now only limited by one remaining factor. We’re finally in a position where it makes sense to begin focusing on improving the amount of traffic arriving into our system.
When we used the example of Hayley in an earlier post, she was stuck in a cycle of dependency with her Instagram account. She needed to invest time and energy trying to figure out how to best game the algorithm, creating content and posts that were ultimately mostly for the benefit of that platform's users. She was working a vassal on borrowed land; her business was a sink that could never be self-sustaining.
But had she gone through the Stages of Succession with her email marketing ecosystem, Dispersal, Recruitment and now Establishment, Hayley’s scenario couldn’t be more different. Instead of relying entirely on the users she can attract from other Walled Gardens, Hayley would have built a garden of her own. In Voltaire’s terms, she’d have truly “cultivat(ed) (her) own garden”.
With this, Hayley’s opportunities for improving her traffic would now be better than ever. This is because improving LTV allows her to understand how much an average customer is worth.
With this information, we can now access new channels to acquire traffic. We now understand what a subscriber costs to acquire, so we can access new traffic channels beyond the scope of those originally available to us.
For example, if we know an average customer has an AOV of $106.25 and an Average Purchase Frequency of 2x per year, we know that we can spend anything up to $212.49 to acquire that customer, and still be profitable.
Options such as Advertising, PR, and paid promotions and partnerships begin to make good business sense. These aren’t just “risky bets”, either: you now know what you can afford to pay for these new channels because you have a better understanding of your unit economics. And when you do send this traffic into your email marketing ecosystem, you’ll know it’s primed to make the most of it.
Coupling this with a tool to assess the current constraints in your business, you’ll always have a way to look back to what your current limits are, and where to focus next in order to continue optimizing growth.
"There's no clearer guide to getting maximum results and impact from email.
This book will change the way you think about email marketing automation in your business"
— Nir Eyal, author of Hooked: How to Build Habit-Forming Products and Indistractable