Does this sound familiar? You’re growing Amazon sales month on month, you have achieved your target ACoS but you’re struggling to increase overall profitability.
It’s a common refrain. So much emphasis and public advice concentrates on ACoS as the core metric that everyone should be optimising for. Whilst that’s great for topline revenue, it’s not the best way to increase Amazon profit.
That might seem counterintuitive at first glance. But shaving small percentages from ACoS is actually only shaving an even smaller percentage from your overall cost of selling on Amazon.
To truly accelerate profitability you need to make more money from each customer that you sell to.
That’s where optimising for customer lifetime value (CLV) comes into play. In this article I’m going to show you 7 ways that you can improve CLV but before I get to that let’s define what customer lifetime value actually means.
CLV is the worth of a customer over the duration that they purchase from you.
In its most basic form it is the average amount of revenue you make per customer.
In the context of Amazon, most costs are fixed costs
If you advertise on Amazon that cost is roughly 10%-20% (it will vary wildly from seller to seller but this point still stands in most circumstances) of the sales generated from ads. Ads might make up 20% of your overall sales. This is why I say that reducing ACoS by a few percentage points only has a marginal impact of profitability.
So with little control over your costs, extra profit can only come from generating more revenue from each customer.
The most experienced sellers understand this. With FBA costs only rising and advertising costs going in the same direction, optimising for CLV is now more important than ever.
If like me you want to increase Amazon profits then read on to discover ways to increase your CLV.
It’s a truism to say, but all of your customers buy from you at least once. Getting more money out of them at the point of transaction is a surefire way to increase lifetime value.
Test the variety of promotion mechanics that Amazon has to offer. Prioritise promotions that encourage the customer to buy more products in their initial purchase e.g. 3 for 2 offers.
Amazon offers deals and vouchers too. Though these are great for kickstarting sales and improving conversion rate respectively they rarely improve CLV (if anything they have a detrimental impact)
Amazon is rolling out a feature to make it much easier to bundle products without having to physically package them. Keep an eye out for when this feature is realised to your account. North American readers may already have access.
If you have control over production then it may be worth trialling product bundles. Consolidating frequently-purchased-together products makes life easier for your customers.
The higher average order value also may give you more leeway to increase ACoS and drive more sales whilst maintaining profit levels.
Ensure you understand Amazon’s bundling guidelines before committing to this idea.
Amazon’s subscription service is hugely popular. Though they charge between 5%-15% for the privilege of being part of the scheme it does save on any acquisition costs related to subsequent purchases.
By locking in a customer into a long term agreement you automatically increase the repeat purchase rate.
The reducing acquisition cost should mitigate the additional fees. If you’re still wary of Subscribe and Save, consider these other factors
Roll out the program and run our repeat purchase and Amazon customer lifetime value analyses to measure the impact.
Include an insert in the packaging to remind customers that you sell a range of products or the product is designed to be re-purchased.
It’s against Amazon’s Terms of Service to use inserts to encourage people to re-purchase from your website. Don’t do this otherwise you risk being banned from being able to sell on Amazon.
Do use the insert to encourage customers to browse your Amazon store and remind them of the usual product replenishment frequency.
That might sound facetious but no one would argue that improving the product won’t improve customer retention. If people like the product they are more likely to buy it again.
Mine your customer reviews for feedback. Do the same with your competitors. Don’t underestimate the quality of the feedback people give on Amazon. Most people make genuine and constructive comments.
In some cases you can find ways to make the product extensible. Learn from classic examples like Gilette. You buy the handle once and rebuy the razors for years to come.
Amazon stores in the B2B space have the ability to offer tiered pricing. You can offer discounts for larger orders. The more a customer orders the greater the discount.
If you’re in the Amazon Business program then customers can also request a quote for bulk orders. You’re not obliged to accept the quote but you can negotiate to find an acceptable price.
This will require some digging into your transaction data. But let’s say you’ve done that and spotted that the average sales price and basket size is higher during certain periods of the year.
This can often happen for seasonal products like sun tan lotions. People buy in bulk at the start of the summer and continue to replenish.
Conversely people buying in the winter are probably going on a winter break. It’s a one-off purchase so their lifetime value is much less than their summer-buying counterparts.
You will need to run a cohort analysis on your customer data to discover this type of insight. It’s extremely powerful and opens up many possibilities. Check back on the blog as we’re in the process of creating this guide.
Optimising for customer lifetime value on Amazon is the best way to increase profitability.
With FBA and ad costs on the rise it’s more important than ever to focus your efforts on improving lifetime value.
There are many ways to do this (this is by no means an exhaustive list, many people focus on building the brand outside of Amazon to encourage loyalty for example).
Amazon offers many features that support this endeavour but also think hard about improving the product and your brand as a whole.