When you hear advice on how to improve the lifetime value of your e-commerce brand’s customers, you nod your head, but secretly wonder, what does that mean?
It’s okay, you’re not the only one.
Many new and established online brands tend to focus their attention on metrics like customer acquisition, social media ad spend, and other key performance indicators (KPIs).
So why should you care about customer lifetime value (sometimes abbreviated as Customer LTV or even CLV)?
As you’ll learn in this guide, CLV is one of the most important metrics to track. It can benefit your company in many different ways, such as helping you reduce your customer acquisition costs, improve your marketing efforts, and much more.
Here’s the thing: learning how to calculate CLV and put it to good use takes a little practice. That’s why we’ll dive into everything you need to know to figure out your brand’s customer lifetime value and use it to your advantage.
Let’s start from the beginning:
“Customer lifetime value shows what revenue a typical customer can bring to your company over the course of your relationship.”
What is customer lifetime value?
This business metric essentially determines how much a buyer will spend over their lifetime as one of your customers.
While it may seem impossible to predict how much money someone will spend with your business in the future, there is a formula for determining customer lifetime value.
Based on statistics such as average monthly purchases, gross margin, and more, you can calculate CLV and gain a wealth of incredible information to help your team make better short and long-term decisions.
But that’s just the beginning of CLV’s superpowers.
Why is customer lifetime value important, especially for e-tailers
Is it better to keep in touch with one customer or to put more effort into acquiring five new customers?
While you may think your business needs all the new customers it can get (which is partly true), you shouldn’t put all your eggs in that basket at the risk of losing a single existing customer.
Why? Because it’s always cheaper for your products to sell to existing customers than to sell to new ones.
New customers need much more convincing to buy from you, and this effort costs you money. Moreover, you may never recoup these costs if they choose your competitors instead.
That’s why selling to customers who already know, trust and like your business is much easier. These customers have already given you their hard-earned money because they trust your product/service and mission.
So would you risk losing these customers only to possibly gain new ones?
Your CLV will help you evaluate the risks as well:
- Make better use of your marketing budget.
- Reduce the cost of acquiring new customers.
- Focus on delivering exceptional experiences for the core customer segment that is most important to your business.
All of these benefits allow your e-commerce store to generate more revenue and save money in the process. That’s a win-win in our opinion.
So now that you know more about the importance of customer lifetime value and the power it holds, let’s dive deeper:
How to calculate customer lifetime value (CLV)
There are several different ways to determine customer lifetime value, including traditional, historical, and predictive lifetime value formulas.
We think the predictive lifetime value formula is the most efficient and easiest to calculate, so that’s what we’ll focus on today.
With predictive CLV, you use customers’ past buying behavior to help you better predict their future actions. It’s like having a crystal ball, if such a thing existed in business.
Predictive CLV doesn’t just estimate what a customer might do, it uses your own business data to build a realistic picture based on statistics.
The formula for predictive CLV is as follows:
CLV = T x AOV x ALT x AGM.
Here you will need to know the following data:
T = Your average monthly number of orders
AOV = average order value
ALT = Average lifetime value of the customer in months
AGM = Your average gross margin
Let’s put this formula to the test and see what it looks like in practice:
Calculating customer lifetime value using an online store as an example
Sometimes it helps to put a higher-level business concept like CLV into perspective with customer LTV examples.
Let’s say your e-store sells and delivers locally grown flowers. When you look at average past sales figures, you’ll see:
The average customer makes about 10 purchases per month (T).
The average order value is $75 (AOV)
Customers typically stay with your brand for 24 months (ALT)
Your average gross margin is 65% (AGM)
After plugging this information into the formula, you will find that:
CLV = T x AOV x ALT x AGM
CLV = 10 x $75 x 24 x 0.65
CLV = 11 700 USD
Therefore, the average lifetime value of a customer of this company would be $11,700.
Now, your customer lifetime value benchmark may be much higher or lower than this value, depending on average transactions, gross margins, customer churn rates, etc.
Further, this formula is predictive, so it can change at any time, but it still provides a solid foundation on which to base future budget decisions.
Again, this customer LTV example will only give you an idea of how to proceed with the calculation to determine your long-term customer value.
Keep in mind that you may have to do a little more math to get to the expressions used in this formula.
For example, to calculate your average order value, you’ll need to divide your total revenue by the number of all orders fulfilled. And to determine the average number of monthly transactions, you’ll need to divide the total number of monthly purchases by the total number of customers.
Your accounting or sales software should help you sort this data. Then you can easily plug these numbers into our formula, calculate the CLV and move on to:
How to Increase Customer Lifetime Value
It doesn’t matter if the value you just calculated is higher or lower than you expected. What matters is that you can increase this number by implementing the following five techniques:
1. Start a loyalty program to maximize CLV
One of the best things you can do to increase CLV is to take better care of your existing customers.
Keeping them happy and continuing to meet their needs should be your top priority. This will ensure that your tribe stays with your business long-term and spends more (both of which count towards the CLV formula).
Customer Loyalty Software can help you create loyalty programs that will increase customer interest and encourage e-commerce advocates.
This powerful tool will allow you to reward your best customers and provide them with incentives to continue shopping with you.
For example, with a points-based rewards program, customers can earn points for taking an interest in your business and making purchases.
Introducing rewards (e.g., a £50 discount on their next purchase) for referring friends and family members will motivate them to spread the word about your brand and help reduce customer acquisition costs.
Finally, and just as importantly, customer loyalty programs like the one we just mentioned in the link can help you identify your best customers within an analytics dashboard.
When you know this core segment of VIP customers, you can use this information to make smarter marketing decisions, go after their purchases in a targeted way, and take extra good care of them.
That’s why so many e-tailers find customer loyalty software an incredibly valuable tool for optimizing CLV.
2. Create a better experience with first purchase
In addition to implementing a rewards program, it is also important to redesign and maximize the first purchase experience to increase CLV.
Do new customers feel welcome, or are they just another customer who is quickly pushed through your funnel like a cattle rancher?
The answer to this question can either help or hurt your CLV.
A great initial experience welcomes customers with a big virtual hug. It makes them feel good about their purchase. And when that first impression kicks off your relationship, your new customers are much more likely to stay long-term.
To make your onboarding experience outshine that of your competitors, you can use the customer loyalty software tool we just mentioned to give new customers bonus points for their first purchase.
Once they’re brimming with warm feelings for your brand, help them extend their good feelings to their friends and family by offering them a discount on their next purchase if they recommend your brand to others.
Follow these two tips and you’ll likely see an increase in repeat purchases and happy customers (both of which increase CLV).
3. Offer related and complementary products in your cart
Take a page from Amazon’s playbook and give new and existing customers recommendations for products that fit together.
You can try to combine similar products or combine different products to complement each other.
Not only will this help increase the value of the average order, but it can also help solve more of your customers’ problems. You can even take the opportunity to show them items they wouldn’t otherwise find (but you know they’ll like).
So if you’re not already offering your customers great deals on merchandise in combination, this is another idea you need to try.
4. Get and respond to customer feedback
Keeping your customers happy is a top priority, as we’ve already mentioned, and one of the ways to ensure you’re doing that is to capture their feedback and make sure you’re actually implementing what they tell you.
Getting feedback can be a little more difficult, but the effort you put in will be worth it because you’ll be able to better serve your customers.
Whether it’s launching new products, updating features, or fixing common issues that frustrate people, implementing feedback will keep customers on board and allow you to stay competitive.
Think of this information as free market research; knowing what your customers want and providing it to them is anything but a guarantee that they won’t flee to your competitors.
5. Improve customer service every step of the way
You’ll never increase CLV if your customer service is very poor.
Customers won’t stay if they struggle to get in touch with or engage with your customer service team, and we don’t blame them.
Poor customer support isn’t just annoying, it reflects negatively on the rest of your brand image. All it takes is one bad experience and otherwise happy customers can leave.
So in addition to getting and responding to customer feedback, take a closer look at your customer service teams and make sure they have everything they need to help customers.
Make sure you have enough support to handle customer queries and that your team is available via email, phone, social media, real-time online chat and anywhere else customers choose to turn.
If you can’t look at your customer service objectively, ask a trusted outside source for help. Ask them to experience what it’s like to interact with your customer support and be open to their unbiased assessment.
Remember, this exercise is all about keeping your existing customers happy for as long as possible. Your customer service plays a significant role in your CLV mosaic, so it’s worth giving it the time and attention it needs to become a well-oiled, super-helpful machine.
Final Thoughts to Improve Customer Lifetime Value
While you may not have thought much about CLV before reading this guide, or weren’t sure why it matters so much, you should now understand why it pays to optimize this metric.
There are plenty of good reasons to calculate, understand and focus on CLV – from increasing revenue and brand loyalty to reducing acquisition costs.
So now is the time to get out the calculators, crunch the numbers and learn your CLV benchmark. Then you and your team can get started with these five strategies for optimizing CLV today.
Wish you had more time to focus on your brand’s CLV? Check out the aforementioned customer loyalty software for an easy-to-use tool that will do the heavy lifting for you!