Episode 43: Millions at Stake? You Better Understand This Metric
Nowadays, finding statistics that will grab attention is simple. Likes and comments on social media and open rates are a point of pride. Business owners are happy to display their monthly hits. However, many of these stats aren't of any substantial value to growing and scaling your brand/business. They may appear beautiful on paper but don't help your beauty brand business scale. You can distinguish between these not-so-useful metrics and the important ones with the aid of this article. Then, I'll describe the most critical metric, how it operates, and how to raise it.
The vanity metrics
Before I get into the actual metric, I want to discuss the difference between vanity metrics and key performance indicators. Many of us can easily get lost in looking at vanity metrics like open rates on email, likes on social media, comments on social media, and an add-to-cart ratio on the Shopify store. But some of those metrics don't move the needle. They don't give you information on what you need to do with that.
So a vanity metric is a metric that looks nice but doesn't mean anything. It doesn't lead to a transformation and doesn't help you understand what to do with it. And one of the most important metrics I often think about when it comes to sales or when it comes to growth is the add-to-cart ratio or the add-to-cart number. So many business owners get excited when they go to their Shopify store on the back end and see that 50 People have added to the cart. And then what?
A vanity metric is a metric that looks nice but doesn't mean anything.
The metric that would help me understand if something is working is the people who've actually checked out. Why is that important? Because if 50 people have added to the cart and only two people have converted or eventually led to a sale, then we have an issue with our add-to-cart funnel.
The reason I'm using this example is that I've seen it actually happen. I did an audit a month ago. We had 50 people add to cart. Only two checked out. So what was happening was the add-to-cart conversion funnel was broken. That's an example of a vanity metric. It doesn't lead to any conversion. It just looks nice. When you're thinking about marketing, vanity metrics include likes and comments. So when you're looking at email marketing, now with all the changes, some open rates can be considered a vanity metric. Because if you're looking at open rate metrics, also look at your click-through rate.
When it comes to data, it's an aggregate of a lot of things. That's why I want us to really focus on key performance indicators. That will give us information that will drive a strategy in your business. And a key performance indicator, based on the example I gave, is the sessions to check out. So 50 People came in, and two checked out. So it means only two people ended up buying. That means 4% of people are moving down our funnel. So that tells us that the add-to-cart funnel is broken.
The #1 Metric – Customer Lifetime Value
When it comes to growing your beauty empire, the number one metric that you need to constantly think about is the customer lifetime value metric.
This is not a transactional metric. This is not a metric that you can look at all the assets you have in the business. This is a metric that you're going to have to calculate.
What is the customer lifetime value, and why is it essential for your business? This metric means you are getting repeated sales and income from a particular group of clients. That is what you should measure. We often get caught up in this journey of acquiring leads. One person buys a product, and we get excited. And just because you've broken even acquiring that customer doesn't mean you've had success in your business.
…just because you've broken even acquiring that customer doesn't mean you've succeeded in your business. We do an excellent job of making sure pricing is accurate. So even if we're running any conversion or paid ads, we can offset the marketing costs. So we can break even from a cost perspective. But what allows us to stay in business, to build brands that stand the test of time, is the customer lifetime value.
We do an excellent job of making sure pricing is accurate. So even if we're running any conversion or paid ads, we can offset the marketing costs to break even from a cost perspective. But what allows us to stay in business, to build brands that stand the test of time, is the customer lifetime value.
Think about a brand like Nike. You'll probably come from multiple other products if you buy one Nike product. You're going to come back for either leggings, you're going to either come back for a t-shirt, you're going to come back for sneakers, and many of us get hooked with the shoes first. So you get a shoe, and then you sold on to the brand. So you paid $150 depending on what type of shoe you buy. And eventually, you will come back and buy your training tracks, outfits, sports bra, whatever it is that you'll buy. Nike is one brand that maximized and understood the power of the customer lifetime value. That's a big brand high in the sky, but I want you to see how this applies and how you can leverage it to your small business.
Just as a reminder, this metric only matters if you're playing the long game. And I'm assuming you're here to build a brand and a business that stands the test of time. If you're doing anything like drop shipping, you're dabbling, trying to see if this thing works, but it's not going to work. This only matters if you're playing the long game and are looking to build a brand. Because ultimately, when selling products, that's the vehicle. That's the product that we're selling. Fundamentally, it's a brand we're building. We're trying to get a community around us, and we're trying to rally people around why we're doing what we're doing.
Key considerations in evaluating customer lifetime value
Consideration #1. Customer retention rate
The first thing you need to consider to evaluate the customer lifetime value is your customer retention rate. Think about how many customers, on average, you can retain in your business. To just make it very simple, think about the last year. How many customers bought from you, and how many customers were you able to keep, and they rolled over to this year? So that's one thing you need to have to evaluate the success of this metric.
Consideration #2. Frequency of purchase
I did an episode that talked about three reasons why it feels so hard to grow your e-commerce business, and I mentioned that one of the strategies is getting your customers to buy more frequently. Please look at that episode. It's in my Facebook group and Instagram, and watch that first to understand why this matters.
So how often are people coming back to buy from you? You have to measure it over 90 days. So if you're selling a beauty product and your audience uses it correctly and has the right size, people should return after 90 to 120 days. If people are not coming back, they're not using your product. So they're not getting the results. And so, it's hard for you to get testimonials and reviews to support your growth.
It takes time to track, measure, and monitor transactions that happen in your business, but if you can give yourself a day every six weeks to note down people who've recently bought from you and when your follow-up is going to be, you're going to make a lot of money. The money is always in the follow-up, especially if they bought from you the first time. So the first purchase is the hardest. But if you can get them to convert, they bought from you for a reason. So now the question is, will you support them through that journey?
The money is always in the follow-up, especially if they bought from you the first time. The first purchase is the hardest. But if you're able to get them to convert, it means that they bought from you for a reason. So now the question is, will you support them through that journey?
Consideration #3. First and second purchase monetary value
The last thing is the monetary value of the first transaction that a customer pays from you, but also what would the monetary value be of the second transaction. Let me give you an example. Just to make it super easy, I'm going to use skincare.
People always want radiance. Everybody's just selling a product that is going to help you glow. And what I'm seeing in the market right now is that it's either serum or moisturizer that claims it will help your skin become more radiant and glowing.
On average, serums range between $85 to $120. So if somebody is coming to your business to buy your serum for the first time and they give you $125, that transaction's monetary value at the acquisition cost is $125. So they've paid you that. Now, if you look at the people who have purchased from you within the last 60 to 90 days and you notice that they all purchase the serum, you have an additional monetary value of, let's say, the glowing moisturizer.
On average, moisturizers cost between $45 to $70. If they come back, the second monetary purchase is 70 bucks. That customer has given you $190. They get hooked and realize, oh my God, I love my skin. I'm glowing. What else do they need? The next natural purchase is always a cleanser. They come back, and they purchase another cleanser. Cleansers are not expensive. Maybe $30. That's an additional $30. And this person constantly gets hooked to you.
So initially, they spent $125 on the serum. Now, if they buy a cleanser, it's 30 bucks. And they bought moisturizer afterward, which was $70. That's $100. They will come back and buy a tuna for about $50. That's $150. Now that is when you're starting to build a brand. But you're not going to be able to do this if, A, you're not following up, and B, you don't understand your customer retention, your frequency of purchase, and what your average monetary value is right now or would be. When scaling, that is the first thing you need to do when evaluating this whole concept of customer lifetime value.
Purchase frequency segmentation
How should you start identifying this? I want you to first focus on your VIP clients. We call them VIPs for a reason, but they are your clients. These are clients that are spending a lot of money on you. They believe in what you're selling and are sold into your mission. So I want you to go and look at your VIP clients. How many are they? On average, how much do they spend on your brand? Why? You need to, first of all, identify that group of people. Because the next step is to get to where we are putting our customers in different buckets. You'll have VIP, the core set of customers always buying from you. So whenever you put out a product, they're in it to win it with you.
Then you have another set of customers that probably buy one to two times. And then you have another set of customers that may buy once, disappear, or are never there. So VIPs buy a lot, set new customers two times on average, and then once. So let's think about it that way. Your job is to ensure you're graduating customers across those levels. Don't give up on your people. Especially if you're a small brand, you have the power to take care of them. Don't send your entire list the same message. Your VIP should not be getting the same message a one-time customer gets. Your two-time customer should not be getting the same email as your VIP. And you don't need to do this every week. So you just need to sit down and ask yourself, when will I be communicating with each audience? It's possible. We do what we prioritize.
I've looked at data for multiple and multiple businesses, and the vast majority of my clients' audiences are always in bucket three. They came once and don't interact much. They have used the product. But now, how do we as business owners nurture that one-time person to be a two-time person? If they came in and bought the syrup, you know the next best complementary item for them. So, reach out, and send it to them. You have to remember, if you don't sell as a business owner, you're not going to eat. This is not a whole thing about feeling like you're overselling. You have bills you're paying every single month. Your phone bill must be paid, your mortgage must be paid, and your electricity and utilities must be paid. And for that reason, you have to be selling every single month.
Sometimes, we don't have the bandwidth or the energy to be marketing on the front end. We have a lot of money left on the table with audiences that have previously bought from us. At the end of the day, ensure that you have about 50% to 60% of your audience around your VIP. If you can get 60% of your audience to VIP, you will build a highly sustainable business because your marketing costs will be much lower now. Then it will be easy for you to implement a referral strategy program. Because now you have a customer base willing to support you, trust in what you're doing, and your audience keeps growing with the right type of person.
If you can get 60% of your audience to VIP, you will build a highly sustainable business because your marketing costs will be much lower now. Then it will be easy for you to implement a referral strategy program.
And how do you get to this deeper level of understanding your audience and creating that group of people willing to buy from you? Really you have to spend time digging deep and thinking about your audience. This work can be very boring, but this is one thing I had seen and remembered in my corporate experience when I looked at the different brands.
Two types of Beauty Brand CEOs
Type #1. The customer-centric brand manager/CEO
Type number one of a beauty brand CEO is a beauty brand CEO that's highly customer-centric. They understand that the only way to drive demand around their brand is if they know their customer, understand their customer journey and ensure that they're speaking to them appropriately. So they know the context of the customer, they know their desired outcomes, and they know what their tradeoffs or their switching factors are. So that's type number one. That CEO can stand out against competition to survive in this highly saturated market, but he's also the one that can build a community around their brand that lasts. So that's the same person I saw that led a highly customer-centric brand.
The emerging brands I was part of and the team I was in were highly customer-centric. I used to do market research. I used to stay in closed rooms for eight hours a day for two weeks. If you asked me what I was doing, I was literally the person taking notes, listening to what the customers were saying, would put them in rooms. They wouldn't see us. We were on the back end. And I would just take notes about everything they're saying, their emotion, their psychology, their social and cultural context. But I never understood why we were doing it, but we were doing it because we wanted to make sure our campaigns speak to them both in-store and out of the store.
When I look at CEOs, beauty brand entrepreneurs, and those that have had massive success in such a short time, that's the number one qualifier—customer centricity. They understand that the only way to drive demand around their brand is spending time digging deep and understanding their audience.
When I look at CEOs, beauty brand entrepreneurs, and those that have had massive success in such a short time, that's the number one qualifier—customer centricity. They understand that the only way to drive demand around their brand is spending time digging deep and understanding their audience.
Type #2. The product-centric brand manager/CEO
For these, it's all about selling the product, pushing hard on the features and benefits, and pushing hard on the promotions and discounts. The CEO of this brand is very reactive to market changes. Big brands could do that because they operated from that perspective. If then in business, the company would not be running. So if you're a small business, you don't have time and money to risk that. You honestly don't. It's very costly. Because if you're running promos and doing discounts 24/7, you're giving away your profit. And secondly, you're getting customers who will not be willing to stay with you for the long haul.
Branding is why people buy you; marketing is how people find you. That why is dependent on your understanding of your audience, and it's at a much deeper level. Think about what they were thinking. What were they doing? How are they feeling when they're coming to look for your product? What's their current state of mind when they're coming to look for your product? Second, what is the desired outcome? What is it that they're looking for? Third thing, what are the tradeoffs? Meaning, what else are they considering? What else are they switching? There's this whole concept of brand loyalty, but I don't want to confuse people. But just remember, that concept often is nonexistent because customers can switch. Brand loyalty depends on what you as a company and a CEO do to keep that audience. So don't just assume that when one person buys from you, they will be loyal.
Branding is why people buy you; marketing is how people find you.
On average, the churn rate for brands is 80%. Meaning if you have 100 customers, 80 of them are going to leave you. You're only going to be able to keep 20. And how I usually help you understand this concept is this. Let's say right now you're looking for a piece of jewelry. Just think about how many stores you can go to right now to get a piece of jewelry. Think about how many stores you can walk in today to get a piece of jewelry, then you tell me if brand loyalty actually exists. Even if I went to Tiffany in December to treat myself with an ornament to support me throughout this year of 2022, I can still walk into Target today and buy the exact same piece of ring I bought. I can still walk in New York & Company and get a piece of jewelry. I can still walk into any store in the mall and still get a piece of jewelry.
That goes to show your audiences have so many options. And if you're in the beauty space, it's even worse. It's even worse because anybody now can make any product and go to any store and buy a beauty product.
So how do you understand your audience? If you have a VIP cohort, just chat with them—literally chat with your audience. Reach out to them. And sometimes your clients can end up being your friends. Jot down your audience's words when they're coming to buy your product. Then use that information to inform your marketing because this is one thing you must remember. It's not a money problem; it's a value problem. So why do I say this?
You must remember that people are always looking for a reason not to buy a product. Think about it. You never go to somebody's site knowing you're going to buy a product unless you have premeditated on that decision and knew that you actually wanted it. So we often go to sites looking for reasons not to buy. A, won't work for my skin. B, too expensive. C, the size is too big. So I don't need anything bigger than announced. So I need something to test it out. That is why objections come out first from your audience.
You never go to somebody's site knowing you're going to buy a product unless you have premeditated on that decision and knew that you actually wanted it. So we often go to sites looking for reasons not to buy.
Now the question is, are you, as a CEO addressing those objections ahead of time? And if you're the customer-centric CEO, you are probably doing that. I know that because it's the content that's very magnetic. It's the content that already has frequently asked questions because that's what people look for. So somebody's objection is will it work for my skin? What do they do? They go and look at the testimonials that have a picture of somebody who has the exact same skin that they have. That's an objection you've already addressed.
Then you move to the second objection—usage. How long is it going to last? You've probably done a video or training or something that is the frequently asked question, how to use your product. Why? Because you've really understood the customer journey. You need to consider your customer journey. You must spend time thinking about your customer journey for this metric to work.
This work doesn't stop. Even at the stage of business that I am in today, I still do the customer journey. I do it every quarter. It's something that I do every quarter. I'm just really looking at the ideal customer. So what was their context before? What are the outcomes, the desired outcomes that they said they want? And what are the tradeoffs? If you spend time doing this over and over again, eventually, you're going to find people willing to buy from you, then you get the right crop of people. Once you get the right crop of people, if you spend time in the follow-up and reach out to people after 60 to 90 days, this eventually becomes a momentum game.
Brands that thrive very well with this strategy are beauty and wellness brands. Think about the people who got sick in December. If they use your vitamins as intended, they'll run out. We're just about to get into allergy season. Have you thought about that? Or are you thinking about how I need to get the new person to come and buy my vitamins? Well, the person who bought from you in December when they were sick still needs vitamins to manage the allergy season that's just about to come.
The third group that can really thrive with this is fashion brands. You're selling a piece of clothing. Seasons change, styles change, and colors change. Everybody who buys a dress will need an accessory. So what do you think about that? Or are you thinking about the next best person to buy the dress? I just want you to think about this because this is where the money is. This also reduces the time to get a new customer and the money it takes to manage the changes in the digital marketing space. And it also allows you to build that community I'm constantly talking about. This is a whole concept of community building.
And please don't neglect your welcome series. We do a fantastic job getting people to buy from us. And when they buy from us, we quickly send them another email about what they need to buy. Your customers are just regular people. You also have to remember that they objected to whether this would work for them. So they give you $125 for the serum. Then the next thing you tell them in the first email is, hey, buy the moisturizer. It hasn't even worked.
Research data shows that small brands lose 70% to 80% of their audiences after the first interaction. This is because they really don't focus on nurturing that audience right after their first purchase. And that is why I want you to go back and look at your welcome series. How would you write that welcome series if you were talking to your friend? That's precisely what you should do. I know templates are being sold. I'm not sitting here in a space where I don't see what my competition is doing. Some people sell templates; put this as your header, your subject line. But I sell brand and build building. That's my value proposition and competitive advantage. And I believe that no two brands are the same. And because no two brands are the same, the messaging has to be very different.
Research data shows that small brands lose 70% to 80% of their audiences after the first interaction. This is because they really don't focus on nurturing that audience right after their first purchase.
You have to do things based on what works for your brand. And I say that because if you're thinking about branding first versus product, you're literally the voice of your customer. So what would your series look like if you communicated it to a friend?
So I'm going to roleplay. I sold a serum to a friend of mine. What would I say? I'll say, "Oh, thank you so much for purchasing my serum. I definitely do know that it's going to help you achieve a, b, c, and d. If you do not get any results within X number of days, please reach out to me." And please make sure that that email that you're telling people to respond back to is an email that you look at. Let it go to your customer support email or your orders email. Just don't make it a generic email that nobody ever looks at. This matters so much. Somebody that is giving you $125 is willing to invest in you and is willing to buy into what you're selling. That's my first email.
My follow-up email is, I could probably think about seven days, based on shipping, whatever, and I would be like, hey, just checking to see how your experience using the serum is. So if you're having trouble using the serum, here's a quick how-to video on how to use the serum. So that's a quick recording you have done. It's templatized. Somebody actually thinks you're thinking about them. Put money down, hands down. I know the most welcome series doesn't look like this. Okay, that's a second email. It's a how-to.
In the third email, invite them to where you're hanging out the most. Do you want them to be part of your community? Do you have a private community offline? Get them there. Tell them what is waiting for them. Is it on social media? How would you talk to your friend if they bought from you? That is what brand building is all about. And because you're actually very small, you're so potent. Why are you so potent? Because you can do this. Don't downplay the fact that you're a small brand. There is power in being a small brand. Because if you can get that person to stay with you repeatedly, you don't need to keep getting new customers and getting frustrated that people are not buying from you. And that's why you need to do this deep work.
Don't downplay the fact that you're a small brand. There is power in being a small brand. Because if you can get that person to stay with you repeatedly, you don't need to keep getting new customers and getting frustrated that people are not buying from you.
Many people ignore doing this work. They say it's boring, yet want money from this person. You want $125 from this person. So how will you get it from them if you don't understand them and are not taking the extra time? It doesn't even take much. A 15-minute best client call conversation you're having is fine. I actually do this. Sometimes I don't even do a call. So I just send them audios on Voxer or IG. Based on that, I get feedback back and forth. And we're constantly in dialogue. I can do that. So the size of my business can support that. So there's a reason I'm putting in so much effort doing that now; it's going to pay off.
And that's why if you're not here to play the long game, this will sound gibberish, and it will be a waste of time. Therefore, don't consider implementing it if you're not in for the long term. But if you're here to play the long game, the people I speak to, the people I interact with, and the people I mentor, they definitely need to consider this.
Ultimately, the two metrics we always focus on looking at the customer acquisition, how much it costs you to acquire a customer, and the other one is customer lifetime value. So what is the worth of that customer? Eventually, what we're trying to do is just trying to answer this question: To what extent is the customer worth their cost? That's a question as a CEO, as a brand manager, as a CMO you're trying to answer. And if you can answer that, you will be able to scale. So I will not say you should be able to scale; I will say, as a matter of fact, you will be able to scale because you're going to ensure that you set up the infrastructure in your business that accounts for your customer journey.
Eventually, what we're trying to do is just trying to answer this question: To what extent is the customer worth their cost?
To recap, the number one metric is customer lifetime value. This is not a transactional metric. The first way of doing this, understanding what it is, and calculating this is identifying your core audience and your VIP audience. Once you identify your VIP audience from their context's perspective before purchasing your products, what was the desired outcome they were seeking? Lastly, the tradeoffs or switching factor, you now move to step two, focus on delighting this audience. They bring in the most margin, and they bring in the most money. Focus on delighting this audience.
Once you've learned what delights this audience, return to your second tier of customers. These people bought from you probably twice and apply those same principles. See if you can move them to your VIP because you want to make sure that funnel is working.
The second thing is to shift your mindset as a CEO from product-centric CEO to customer-centric CEO if you really want to stand out in this market. If you want to play the long game, shift from product- to customer-centric CEO. The customer-centric CEO is the CEO that understands that to drive demand around their brand, they have to understand their customer at a much deeper level. Therefore, they ensure that they map out the customer journey. That is represented in everything they do as a company and brand.
The customer-centric CEO is the CEO that understands that to drive demand around their brand, they have to understand their customer at a much deeper level. Therefore, they ensure that they map out the customer journey. That is represented in everything they do as a company and brand.
Third thing, look at your data. Your data will tell you. It is not complex. Let nobody tell you that we're trying to get you to do a complex algorithm and complex math. Data is very, very simple. Profit margins, net promoter score, customer lifetime value, retention numbers, customer acquisition numbers, inventory order rate, and velocity. That's all you need to know. Everything else is for the advanced people. Where you are right now, you need the essential information.
The last thing is improving your customer experiences, understanding what makes your audience tick, what triggers them, what they're switching to and from, and making sure your content, messaging, and emails reflect that. At the end of the day, your clients are human beings, just like you and me. It's just that to you, their clients. So think about that perspective if this person was your friend.
It's a wrap!
And that wraps up today's session on the number one metric you need to consider as you're scaling your business. Reach out if you need support in creating infrastructure for your business to get to the next level without working more hours and killing yourself. We'll get you to achieve consistent revenue and profits and help you understand the data already in your business. So book a call with me so we can chat about where you are with your brand, where you want to go and map out the next steps.
As always, thank you, my people.
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