Knowing how much your repeat customers purchase over time is knowing a very powerful metric.
The more repeat customers spend and the higher the likelihood of them making a repeat purchase (your Repeat Purchase Rate), the more you can spend to acquire and get repeat orders. That means you can out-bid competitors in paid advertising, or you can invest more into generating content for organic traffic.
This all comes from knowing your numbers though. Without a solid understanding of the lifetime value of a repeat customer, you're at risk for under-funding advertising or over-paying and running at a loss.
Pitfalls of a single lifetime value
Figuring out how much your repeat customers buy is pretty easy. You can use customer lifetime value (CLTV) formulas for this but you need to be careful. Those values don't segment your customers into one-time, repeat, or returning customers so their data isn't going to be very accurate in the aggregate.
They are good guesses for acquiring new customers but you need to use something different once that customer has been acquired.
Average Repeat Order Value
A better metric to use is the Average Order Value but for repeat orders only, or what I'm calling Average Repeat Order Value (AROV).
This is the same as Average Order Value, but it's calculated for each of your repeat order steps. For example, here's a simple list of AROVs for a store that is selling more to their repeat customers.
Here's what one looks like for a store that is selling less on each purchase:
Using Average Repeat Order Value
Once you have the Average Repeat Order Value you can use it as a limiter on your marketing and advertising for each segment of your repeat customers.
Using the above examples, you wouldn't want to spend more than $100 in order to get a second order from these customers. In fact, you'd want to spend far less to make sure you can cover your costs and have a decent margin, let's say around 5% ($5) or 10% ($10).
Since getting a repeat customer to buy is easier than winning a new customer, that $5-10 can go pretty far for a single customer:
- Sending 1,000 emails through your loyalty campaign (cheap because emails basically cost $0)
- Few hundred impressions through retargeting
- Offer a $5-10 off coupon to this specific customer
Depending on your margins, you might be able to spend much more.
Calculating your Average Repeat Order Value isn't that difficult, but it will be time consuming and will probably require a spreadsheet.
As an alternative, Repeat Customer Insights calculates this for your automatically. All you need to do is to look for the AROV for the specific step you want, plug in your margins, and you now know the maximum you'd want to spend per customer to get them to buy again.