To be successful and start making money, startup owners need at least to be able to analyze their audience, market and economic metrics. In this article, we will look at how to calculate LTV for eCommerce, what related metrics exist, and how to interpret them correctly.

You may be also interested in how to calculate churn rate.

What is an LTV for eCommerce?

LTV—Lifetime Value—is a gross profit that a user brings to a business over the entire time they work with this business. It is a metric which is indispensable in marketing, customer acquisition, and customer retention work, especially when it comes to eCommerce.

You have to make sure that customers are valuable and the resources for their attraction does not exceed the profit of the whole cycle of customer relationships, otherwise you will simply go bankrupt. For example, you sell perfume or cologne. Attracting each new customer costs you $50. In this case, the analysis shows that you need to make a strategy so that the revenue from the client should be 3-4 times more, that is about $200. 

Why Is Customer Lifetime Value Important?

Each marketplace business and marketing strategy are built on revenues exceeding expenses, and the LTV ratio is a key component of marketplace unit economics, serving as an indicator of current status.

• Identifying the most loyal customers. Clients with the highest LTV coefficient can be called loyal clients. Most often these are clients who have the biggest average check or they can have a smaller check, but make purchases more often and bring business more profit due to the quantity. Entrepreneurs need to pay special attention to these metrics and focus on increasing their loyalty and retention.
• Optimize customer retention efforts. LTV is one of the most significant figures. For example, if CAC—cost for attracting a customer—is higher than LTV, you need to focus on increasing the customer cycle time or finding more effective engagement channels. This also applies to comparing other metrics.
• Understanding behavioral factors. You are able to adjust communication with the client on the website depending on the value of the LTV factor and understand what exactly makes them want to buy your product.

What is the difference between LTV and CLV?

The terms LTV and CLV are very close in meaning. They are often used synonymously. However, experts distinguish a slight difference between them. CLV or CLTV is calculated per one particular customer, while LTV is a measure of the average figure for CLV of a certain group of customers. In this article we will use these terms as synonyms with the first meaning.

Key metrics to know before you can calculate LTV

This block is a crib for you. Below is a list of terms related to LTV calculation that will be used in the next section.:

• CAC—Customer Acquisition Cost—the average cost of attracting a user;
• ARPU—Average revenue per unit—an indicator of the profitability of a product based on the amount of money that is generated from each of its users or subscribers; 
• Lifetime—customer interaction time with a company;
• Customer churn—a company’s loss in subscribers for a given period of time;
• Gross profit—represents the income or profit remaining after the production costs have been subtracted from revenue; 
• Revenue—the amount of income generated from the sale of a company’s goods and services; 

Source

How to calculate LTV eCommerce?

There are a lot of methods to  analyze and count LTV which you can find on the Internet. But most of them are irrelevant. Let’s define the most common formulas which are applicable to marketplaces.

Why is a simple formula for LTV not a reliable approach?

The most wide-spread formulas are these two:

• LTV = Lifetime * ARPU 
• LTV = ARPU / Customer churn 

ARPU metric is based on revenue. You might remember that LTV is a gross profit from customers, but these two formulas are based on revenue which is not equally the same as gross profit. When we are talking about the digital sphere, their product is close to zero cost by physical resources. In this case revenue and profit are very similar. Yet, for many other businesses it is not true since gross profit and revenue will differ significantly. So, these formulas can give you very approximate results which may be very far from the real state of your business. The LTV counting should be based on gross profit. There is a complicated analysis but it is reliable and true.

Cohort Analysis as a perfect way to monitor LTV

Cohort analysis may seem as a difficult system but we will try to explain it in a simple way.

Let’s start with how to work with gross profit and how to calculate it correctly. Remember that gross profit is the result of deducting all variable costs that are directly related to the product or service sold from revenue.

Simple rules for determining what expenses must be deducted from revenue to make a gross profit are:

• If expenses grow in proportion to sales, they should be deducted. These are variable expenses.
• If certain expenses do not grow proportionally with sales, they do not need to be deducted. Most likely, these are fixed costs.

Thus, for a company that deals with a marketplace, variable costs will be considered the cost of new modules, annual updates, commissions, the amount of which depends on profits. But the salaries of employees, for example, managers will not be deducted because it is a fixed expenditure.

A concept of cohort analysis

Now when the gross profit calculation is clear, we can turn to the cohort analysis. A target audience is a mixture of different people: those who began using your service just now, yesterday, last month, and last year. Data of these heterogeneous people is difficult to track, monitor, and analyze. 

The concept of cohort analysis is to highlight several users groups—cohorts—by certain features, and to monitor the behavior of those groups over time. The picture below illustrates how many percent of people of a certain cohort used services of a company. Percentage in the picture is an LTV for a certain day.

Typically, cohorts are defined based on the time when people of a certain cohort started to use your product or store. By identifying these users groups, you track them during all periods of time and measure essential metrics for each individual cohort. Thus, by comparing the cohorts’ performance of two consecutive months, you can objectively compare how good were product versions corresponding to those time periods, what stage needed to be improved, and how your eCommerce success metrics have evolved.

For deeper analytics, the highlighted cohorts can be divided into littler groups according to different characteristics like language, location, traffic source, and other suitable points which make sense for your business. Chances are your main metrics will differ for various segments, just as product changes will affect various customer groups differently.

Each user goes through several stages from first contact with a company to repeat sales. These stages are individual for each business, but to show how cohort analysis works, we can conditionally distinguish three stages: first contact, first purchase, repeat purchase. There is also a branch here where the customer can stop any relationship with a company at one of the stages. The duration of each of these stages can be tracked on each group, you can calculate the average value, determine what affects the acceleration of transition processes from stage to stage, and track the CAC metric more closely. According to these data, it will be possible to predict the growth or decline in sales. 

For ease of representation of LTV analysis, you can use a common Google or Excel table, special online services or specialists who can help to analyse metrics.

How to increase LTV?

• Customer Services—the happier your customers are, the more money they will spend with you. Companies that are actively customer-focused earn more. For example, you can improve this sphere by offering a special discount for repeat customers, bonuses, and gifts for participating in a loyalty program.

• Customer Retention—acquiring a new customer can be a costly affair. You need to retain those users who are already paying you. This is guaranteed to lead to an increase in profit per customer and therefore an increase in LTV. For example, to retain customers, you can offer them additional products by working with up- and cross-sales or you can re-promote the product after the expiration of the usage period.

• Sales Orientation—now when your customers understand how much you value them, it is time to take a closer look at your sales. Increasing sales per order is achieved by working closely with customers right at the time of purchase. You can introduce warranties and gifts for certain purchases.

Summary

Although there are many possible formulas for calculating LTV eCommerce, the most reliable way is cohort analysis. So, in this article, we looked at how to calculate LTV for eCommerce. This calculation is applicable to different types of businesses, including marketplaces. LTV Metrics helps entrepreneurs and startups to assess customer engagement and loyalty, to see how well marketing funnels are working, and to predict the further growth and development of a company.

What is UX and UI design?

Since the nineties, the idea of design thinking was born and evolved. Specialists in those years began to study how a designer thinks. This idea shifted from the theoretical to practical experience. This approach was perceived as an innovative one and served to organize complex mechanisms and designs as conveniently as possible. The popularity of this approach has been growing since its creation. It is now used in various spheres from finance to IT.

There are two terms that are very close to each other in meaning: User Experience and User Interface.

User Experience is the impression that a user gets from working with any interface. The main requirement is the simplicity of achieving the purpose for which an interface was invented. The User Experience can be described as the logic of an interface. The interface must be properly designed and adapted to accomplish certain goals in a simple way.

User Interface is a set of characteristics of an interface. This is the part that determines how comfortable the design is to use. For example, how readable the text is, whether the buttons are easy to click or their placement is reasonable, and whether it looks good all together.

UX and UI is the design of any user interfaces in which usability and beauty are equally important. In the context of marketplace website design, this balance is crucial to keep buyers engaged and drive conversions. Today, these terms are associated with websites and smartphones, but are applicable not only in IT.

Although the profession has existed for a very long time, it did not have a specific name before. It used to be that the function of UX/UI designer was performed by an inventor himself. Let’s look at the developments of past centuries and what role UX and UI design played.

For example, the weaving loom. This machine was invented in 1785, but even then the principles of UX/UI design were applicable in the development. The inventor planned how the machine would look and work: whether a user would sit or stand, how they should press the pedals and where this pedals would be located, how many heald frames are necessary for convenience, what details should be there to make the weaving process comfortable.

Now the same planning is a common practice in different areas. This approach is also crucial in marketplace app development, where intuitive UX and UI design play a key role in user engagement and retention. Indeed, such design is applied very often in IT. This is due to the fact that developments in this area are steadily growing.

10 tips of how to improve User Experience

Let’s see what are the leading features which can help to improve User Experience and create a buyer oriented marketplace.

1. Simplicity—Simplicity implies getting rid of unnecessary elements. This can also include the correct three-color scheme, empty spaces and the logical organization of a website in general. The customer should be able to understand the process from product search to delivery. Your goal is to make a marketplace clickable and informative.
   
   The common logic of a website or marketplace is built on the principles:

• A narrow focus of content on each page. This form of content organization allows a visitor to understand what this page serves to and quickly find necessary information.
• The adequacy of design. It is important to use the already established rules and elements of design. For example, use checkboxes—a square element—when users have multiple choice and radiobuttons—round elements—when users can choose one variant only answering a question. Another example, red color for warning notifications and green for confirmation notifications. On no occasion should you do it the other way around.
• Rank information by priority. Important information should be placed at the beginning of the page, secondary information at the end, or even in the footer of a marketplace.

2. Leave some space—whitespaces allow your design to look beautiful and elegant.
   
   Use spacers in the text and separate logical blocks, elements and pictures. You can leave space not only at the top and bottom, but also on the right and left sides of the blocks and elements. Moreover, for the last few years there is a trend for minimalistic design so whitespaces help you to keep up with the times.

3. Feedback learning—feedback is a very important and useful tool in design and marketing. In addition to feedback from social networks or a website, you can search for feedback on special websites, where people can find information about a particular company, see reviews and customer recommendations. Study all possible resources and highlight your strengths and weaknesses based on user experience. This will help you analyze your business and later run buyer oriented marketplace PR strategies.

4. Loading time—Speed is valued on the market. If page load time and response time are not very fast, a client will simply leave your non-buyer oriented marketplace without even reaching the first step of contact with a product or service. Loading speed directly affects whether a potential customer will take shopping on a marketplace or leave it.

5. The content should be useful—any text on your website or marketplace should be informative. You should not write a text just for the sake of a text. If there is a blog that adjoins your marketplace, then you have to make your content diverse. Each text should have its purpose: informative, selling, entertaining, and useful.

6. Consider localization—at the first glance, localization of the user is not the most important feature to think about. However if you use localization on your website or marketplace, it may influence the language of pages, the correct display of products as well as relevant adaptation of some cultural features.

7. Responsive design—in today’s world, users become more demanding of the website design. Pages should look good and be easy to navigate. Potential customers are immediately discouraged by unpretty graphic, stock pictures, unavailable buttons, and incorrect dispaly of a website. There are several types of responsive design: for desktop, phone and tablet versions. The more types of adaptations are available, the greater the audience of potential customers you can reach. As it was mentioned, your potential customers should be able to find any information easily. But without responsive design they could not do that.

8. Transparency—make sure your marketplace resonates openness, clarity and honesty. While using the website, a customer should clearly understand the rules and the processes that go behind buying the product. From finding the right item to ordering and product delivery, the processes should be transparent. Forging trust between a business and its clients is important. If there is a lot of ambiguity in a marketplace, users are likely to leave a page. When buying something on the internet, people are looking for clear and problem-free experience, and your marketplace should make them feel that this is what they are going to have.

9. Password-free experience—using passwords to enter your account is a familiar method used by many marketplaces, but not the most secure one and according to the recent research boring to users. Password-free approach is one of the new trends of recent years. It has gained popularity because people have become tired of the large number of passwords that they have to remember. Passwords can be replaced by other authentication methods. Push-authentication is one of them. It means that when you reply to a secure push notification, the login on the second device is done automatically. Another one is the adaptive authentication that takes into account location, time, IP address, and device type. Password-free authentication happens through biometric data such as fingerprints or face recognition.

10. User research—user research is important for running a successful buyer oriented e marketplace. It is more than just a feedback. Learn more about the interests of your customers, preferences and experiences. Use all available tools for that, such as surveys and direct communication. This is an excellent and sometimes underrated way for interacting with your target audience. 

Buyer oriented marketplace example

A primary example of a buyer oriented marketplace is Precious Plastic Bazar. It is simple, minimalistic, and good looking. The main feature of it is that there are no unnecessary elements. It has a clear structure of product categories, basic localization, and convenient ordering. It follows simple logic of UX and UI designs. It is not overflowing with bulky elements which make it appealing for people. 

This marketplace was made on the CS-Cart Multi-Vendor platform. It is one of the leading platforms which allows for creation of a website for all tastes and types. As a platform has an open code and more than 2,000 add-ons for usage, it does not limit a business. It is an on-premise platform with one-time payment methods. There is also a buyer oriented marketplace app for Android and IOS is available. You can try a free demo and create your demo marketplace.

Summary

All in all, creation of a buyer oriented e marketplace is not as difficult as it may seem. You have to take into account preferences of your target audience and maintain logic on each step of the sell and buy process. All these steps can influence the efficiency of a business and help to build relevant buyer oriented marketplace PR strategies.

How to stay on the top in such a highly competitive environment? A particular niche is the answer.

When you first start thinking about opening a marketplace you should decide which concept of it you will pursue. In this article, we will look through the main types of marketplaces, their benefits and features. We will focus on a local service marketplace more comprehensively.

Classification and structure of marketplaces

To create a marketplace successfully, you should know their structure. There are several types of marketplaces. They can be divided according to the commodity, the target audience,a number of product types, and the territory. 

By the commodity:

• Product marketplace. Marketplaces for physical products are one of the most common types. It is Amazon and eBay, for instance; 
• Service marketplace. Marketplaces with services can offer freelance work or some kinds of helping services; 
• Booking marketplace. This is a vast niche, so booking can be singled out from other services. There are services such as booking of a hotel room, tickets, cars, etc.

By the target audience:

• Business-to-Business. Businesses intend for other businesses and sell the object of marketplaces to them. It is about interaction between legal persons; 
• Business-to-Customer.  Businesses provide individuals with products and services;
• Customer-to-Customer. This type gives the opportunity for individuals to display and sell their products and services for other individuals. It can be a marketplace of used things or freelance services.

By a number of product type:

• Vertical—marketplace sells one product type;
• Horizontal—have several product types with common characteristics;
• Global—have several product types with absolutely different categories of products. 

By the territory:

• Global—Obviously, global marketplaces work all over the world or include several countries. A customer from any point of the planet can place an order and a marketplace guarantees that ordered products will be shipped to the customer;
• Local—A local marketplace covers only a certain territory and delivery may not be available in any other place.

Marketplace’s classification is a handy knowledge. It can suggest the direction of marketing strategy and developing points, when managing a website. Read more about types. 

Local vs Global marketplaces 

When world marketplace giants conquered the market, small businesses lost their positions. However, one cannot see through a brick wall. In certain conditions global marketplaces are not as powerful as they seem at first glance.

For example, the world famous taxi service “Uber” had a lot of difficulties when trying to win the Indian market. There is a local taxi company “Ola” which is very popular there and based on the needs of local society. “Uber” is still making concessions to win the market. 

When we talk about a local market, one may imagine a small territory but it is not the case. For sure, it might be a business within a city, but usually the term “local” includes the territory of a whole country. Local does not mean limited. These companies leave the idea of globalization in favor of quality. 

What are the benefits of local marketplaces?

• Local interconnection. It is important to have connections with people. With the knowledge of the social environment, it is easier to gain trust. You know which companies you can attract to your project. It is like knowledge of the context of partnership. 
• First-hand experience. You have a unique possibility to learn the real needs of the people from the region you are going to work in. At least, you might have faced problems yourself and you can already guess what and how to improve. You know the “pre context” of this communication “business-people”, audience’s tastes, so it is easier to recognize the most efficient marketing strategy.
• Local support. Foreign companies look destined from a certain group, while local companies are more readily supported by people from the same location. It is a matter of pride and community. When you start a business in a familiar location, you already have common ground with your audience.  

The key message is that we should not underestimate possibilities which are provided to local businesses. Globalization is about “how much you can sell”, but locality is about “how good and specific your offer is”.

Wants of a certain group of people may not coincide with the demands of people from other places. It generates the possibilities for a niche market—a market with a range of products and services that are relevant only in a certain place. It may grow in the form of a local services marketplace.

Niche market 

A niche market is a specificity of the business; a part of a market with high demand and low supply. Working in a certain niche gives an advantage to a business owner since there is no genuine competition. Sometimes people are afraid that they can miss opportunities if they choose a niche, but these hesitations are unfair.

What are the advantages of niche market:

1. Less competition. For the first time you will have less competitors, sooner or later this sphere may become overloaded with other businesses. But you still have the advantage over others since you are one of the first players.
2. Brand loyalty. You can concentrate on services and clients to become a credible and attentive partner. This helps to build a positive image which will an advantage when the niche will have another players in it.
3. Higher profit. Clients do not have the opportunity to get the similar service or product from the outsource that is why they are ready to pay a higher price.
4. Expertise. It is difficult to be a know-it-all, but if you have a niche you can become a specialist in one sphere. Experienced professionals always attract partners and customers. 

Marketing spendings is a double-edged sword in this issue. On the one hand, a particular product or service allows you to recognize your audience easier. On the other hand, it is an unfamiliar field and standardized marketing patterns may not fit. 

What are the characteristics of a niche market:

1. There are no big players at all or competition is very low;
2. The demanded products or services can be specific;
3. It can be a niche at the intersection of two spheres.

However, these points are very tricky. Imagine a rosy picture: Michael is a young businessman. He has found a unique concept with no competitors on the market, he asked his close friends about this idea and they highly esteem it. Michael invested all his money in this project and it was a total flop. What was a mistake? The start-up looked so good and it met the characteristics. The key step here is to test the idea.

Do not be trapped by fleeting inspiration for a new project, stay cool-headed and test a minimum viable product (MVP), organize survey and research, try to find similar successful and unsuccessful start-ups in this niche. All these measures need not to be subjective since a circle of close friends or family members may be a too specific group to test the demand. So, it is about the requirements for choosing a sphere. 

The requirements for entering a niche: 

1. Relevance of the idea. You must have an audience. It is MVP that can help you to determine the validity of the idea.
2. Customer focus. The idea should be related to current preferences of the audience. You should be customer-oriented and ask for feedback from your current customers. Your product should correspond to modern tendencies which can be distinguished by such searches. 
3. The advantage over competitors. The uniqueness of the idea lies not in the creation of something completely new, but in the improving of the existing concept that will give you an advantage. It is better if the idea has possibilities for fast scaling.
4. Balance between investments and profit margin. The higher the margin, the higher the profit of your business. Try to choose the most profitable idea or add high margin products for cross- and upsales. If the spendings is too high in this niche this idea is not appropriate.

How to choose a niche:

1. Identify your interests and strengths. Only if your activity brings you a sense of satisfaction, can you do it well. It is appropriate to business, too. Find your key skills and knowledge and use them at full capacity.
2. Do some research. Surveys, statistics, talks, everything is beneficial in this deal.
3. Learn your audience. It is about a deep knowledge of your future customers. Try to learn mainstream and tendencies in your niche. 
4. Test your idea. Once again, test your business model!

Generally speaking, doing business in a certain niche is a reliable strategy. As well as other business models it should be tested and considered wisely. 

Steps before you decide to create a service marketplace website

First of all, let’s look at the comparative table. There are some principle differences between product and service marketplace. 

According to this table we can distinguish the main features of service marketplaces: 

1. Services do not have materialistic component, margin profit is higher, so the marketplaces fee may be higher
2. The most common cases for services marketplaces are C2C and B2C relationships.
3. Such marketplaces should be promoted twice as hard to be successful.

You should find a niche according to these features. There are a lot of popular variants of platforms of this type: a marketplace for IT services, private tutoring, booking services, etc. 

However, let’s be specific. We are trying to find a variant for people from a certain location. So, it should be services that obligatory require the real presence of a specialist or any other face-to-face contact. For example, you can find a developer from a distant country for your project, but you cannot ask a plumber from another country to come to repair a pipe. The local service marketplace is based on this simple rule.

If you already decide to create a service marketplace website or you have any other idea and you are looking for steps, tips and advice on how to launch a marketplace, read this article. It explains the marketplace technology, classification, and the universal steps of how to launch it. You can also try a demo version of a marketplace launched on CS-Cart to see how it looks.

Summary

In conclusion, the specificity is a game-changer in today’s business. We look through the main points of niche characteristics, types of marketplaces and unusual strategies on how to reach success. There is no doubt that the sky is the limit and localization and specificity are not a burden. They might become the best foundation for your business.