Ecommerce business owners and marketers often find themselves busy tracking and analyzing countless business stats, charts, lists, and graphs.
Don’t get us wrong, the numbers can be helpful.
As the good old saying goes, “what gets measured gets managed.”
But sometimes, metrics can be vanity numbers that distract more than help.
At the end of the day, only a few metrics matter.
Cutting out the fluff and defining the key metrics that actually move the needle in your business, will guide your everyday decisions and help you prioritize.
One critical metric that should be at the center of your business strategy is customer lifetime value.
Focusing on this metric will help you increase sales, lower expenses, and efficiently grow your business.
If you want to learn more about customer lifetime value and the key strategies on how to improve it, you've come to the right place
My name is Omar, I’m the CEO of OJ Digital Solutions, and in this article we’ll discuss all things around customer lifetime value and how to use this metric to bring your ecommerce business to the next level.
Let’s get started.
What Is Customer Lifetime Value?
What is the definition and true meaning of customer lifetime value? Customer lifetime value measures the total revenue you make from an average customer over time.
In other words, Customer lifetime value measures the profit you gain from a client over your relationship with them.
Knowing your customer lifetime value helps you understand how your customer interactions work and the effectiveness of your marketing efforts.
It can cost up to five times more to acquire a new customer than to retain a new one. Thus, you want to find ways to extend your relationship with existing customers. That strategy involves increasing a customer’s lifetime value.
Measuring your customers’ lifetime value gives you insight that can help with long-term business growth and sustainability.
CLV also measures your customers’ loyalty to your brand. If customers keep buying from your business, it extends the customer lifetime value, often showing how much they value doing business with you.
Your goal should always be to have a higher CLV.
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Why Is Customer Lifetime Value Important in Ecommerce?
Measuring and optimizing customer lifetime value matters immensely because of all the fantastic benefits that a healthy CLV brings to your business.
Here are a few of the significant advantages of having a good CLV.
Retaining new customers isn’t the only way to grow your profit. You can also achieve that by retaining existing ones and extending your business relationship. By improving customer lifetime value, you increase profits over time.
That’s because a customer who stays in a relationship will buy or book your services again and again over time. As a result, you end up earning more over time.
Stabilizes Cash Flow
A high CLV can help you smooth out your company’s cash flow by giving you a good prediction of future customer spending.
If you can determine that the customer lifetime value of a newly acquired client is around $500 in one year, you can foresee that one new client will bring that much revenue next year.
This measurement helps with forecasting what your sales targets should be. By understanding customer spending habits, you can predict your revenue and plan better for future expenses.
Attracts More Target Customers
You can also determine your target customers and develop more effective marketing strategies with a high CLV.
Not all your customers will have the same CLV in your business. Some customers could bring in a few hundred dollars, while others might bring in thousands. You’ll want to target customers that bring more revenue over time.
By understanding which customers are more profitable, you can tailor your marketing efforts to attract more customers and bring in more profit.
Boosts Business Growth
Small business statistics in 2022 show that only 63% of businesses are profitable, down significantly from the 78% rate in 2019.
Understanding data like your customer lifetime value can help you improve profitability and keep your business healthy and growing.
Your customers’ lifetime value helps you identify opportunities to grow their businesses.
Whether those are customers with higher CLV or specific marketing channels that drive results, you know where to focus energy to get more profit and reduce expenses. This approach will help you grow your business over time.
Indicates Customer Sentiment
CLV can also help businesses measure customer sentiment, an essential factor for customer loyalty.
By understanding customer sentiment, you can measure and observe customer engagement and generate more business.
A high customer lifetime value often indicates your customers trust you enough to continue doing business with you.
If your marketing CLV is low because your customer lifespan is low, it could indicate that your new clients don’t trust you enough to continue working with you.
Principle Behind Customer Lifetime Value
Here are a few essential principles to help you understand customer lifetime value and find means to improve your CLV.
Your recency measures how recently a customer has interacted with the business.
This measure could include how recently they made a purchase, visited your ecommerce site, or interacted with your customer service representative or team.
You’ll want shorter times between your recent contact with your target audience. When your audience interacts with you more frequently, you increase the likelihood of repeat purchases.
Improving your customer lifetime value can help you enhance recency in your business. Customers will most likely communicate or transact with your brand more regularly.
Frequency is how often a customer interacts with your company. Customers who interact with your brand or channels are likelier to have higher lifetime values.
Don’t confuse frequency with recency.
Frequency deals more with how often a person interacts with you or your brand. Recency deals with the time of your last contact with the person.
These two may sometimes overlap but measure them separately.
You want to be able to increase the frequency of purchases. Customers who interact with the business more often tend to have higher lifetime values because they are more likely to continue making purchases in the future.
Monetary value is the amount a person will spend on your business over a certain period or for the duration of your transactional relationship.
This principle is crucial in optimizing your customer's lifetime value. There’s a lot that comes into play regarding this principle.
There’s a balancing act between the amount you charge per transaction and how many times they might purchase.
You could charge someone $1,000 for a product, but they never buy from you again. This scenario is less favorable than a transaction involving four purchases worth $500 each.
Data Required for Calculating Customer Lifetime Value
Measuring the lifetime value of a customer starts with understanding what data you need to calculate for your CLV.
Here are the data points you should measure to monitor your customer ltv with your ecommerce business.
Average Purchase Value
Average Purchase Value is the average amount of money a customer spends each time they purchase. You must understand this to accurately understand how much customers spend in a given timeframe.
Average Purchase Frequency Rate
The Average Purchase Frequency Rate is the average number of times a customer makes a purchase from your ecommerce store or business within a given period.
If your customers buy products from you weekly, your frequency rate is one purchase every seven days.
This metric will help you determine how often customers return to your site to make a purchase.
Average Customer Value
Average Customer Value is the average amount of money a customer spends throughout their lifetime with the company.
The average value helps you predict how much you might earn from a client or customer. Generally, businesses that drive repeat purchases tend to have a higher customer value.
One example would be a subscription to coffee beans which regularly sends out specialty roasted coffee beans to its customers weekly, bi-weekly, or monthly.
Average Customer Lifespan
The Average Customer Lifespan is the average time a customer remains loyal to your business. This figure is the average time a customer spends transacting with you.
This metric is vital in determining the total time you can expect a customer to remain one.
How To Calculate Customer Lifetime Value
Here’s the most common method of computing customer lifetime value.
Customer lifetime value = customer value x average customer lifespan.
Using this formula, you’ll need to multiply the average order value, average annual spending, and average customer retention time in years by each other to arrive at the final figure.
This approach allows you to derive the customer value and average customer relationship lifespan.
You can generally take this by getting the average purchases per client over their lifespan, and the average time they stay with your customer.
You can use data and reporting tools or a client relationship management tool to keep track of these data points.
Another way to compute customer lifetime value is to use this equation:
LTV of Customer = Average Total Order Amount x Average Purchases Per Year x Retention Rate.
To use this formula, you will need to derive the following values:
- Average Total Order Amount – This value shows the average amount a customer spends per order.
- Average Purchases Per Year – This value represents the average number of times a customer purchases in a year.
- Retention Rate – This is the percentage of customers who continue to purchase from a business over time.
Multiplying these three values together will also help you determine your customer’s lifetime value to your business.
How To Increase Customer Lifetime Value
Whatever the customer lifetime value of your business relationships, you don’t have to live with that figure forever. There are ways to increase it, so your business makes more money over the long term per customer.
Here are some of the best ways to increase your customer's lifetime value.
Launch a Loyalty Program
The first strategy to help improve customer lifetime value is to create a loyalty program. You can do this by rewarding consumers for their loyalty through a program that gives them perks as your business relationship progresses.
Improve Customer Experience
Customer experience plays a crucial role in retaining customers over the long term. One poor experience with your brand can drive away customers who could potentially buy from your store over and over again.
Provide an excellent customer experience by resolving any issues that could cause your new or existing customers distress or payment.
Train your customer service team and help them provide top-notch support. Teach them what to say and how to solve common issues with their orders.
You serve them longer by making your customers feel valued and appreciated. Provide free shipping, easy returns, and even refunds if need be.
However, you also want to ensure your service is fair to your business or employees. Be ready to turn down a troublesome client if they will only cause more burdens over the long term.
Stimulate Upsells and Cross-sells
Upsells and cross-sells are some other ways to increase customer lifetime value. You can do this by offering different products your current customers might also be interested in purchasing.
Offering related products and services will increase the total value of each customer's purchase.
Simply offering products for people to buy isn’t enough. You need to learn the art of masterful copywriting, which involves learning how to write product descriptions, email drip sequences, and ads that convert.
Leverage Social Media
Social media can be a powerful tool for increasing customer lifetime value, especially if you create a community through your social channels.
Don’t be quick to make another sale through your social channels. Sometimes, you can nurture existing customers by giving them content they’ll love.
Learn proper social media marketing by mastering the ins and outs of each channel. Provide content that adds value and entertains your followers and existing audiences.
Wondering why social media is important for business and improving CLV?
Social media is engagement-driven.
Increasing the recency of touch points will keep your brand top-of-mind, driving them to your store when they need products in your niche or category.
Provide Awesome Customer Service
All your efforts to drive repeat sales will not matter if you offer poor customer service. Ensure your support and aftersales are top-notch.
When customers encounter issues with your product or service (which they eventually will), be ready to replace the product or re-issue an order for repeat service if you want to extend your relationship with a client.
Take Advantage of Email Marketing
Running email marketing campaigns is another effective way to stay in touch with existing customers and encourage them to return.
You can use email automation sequences to offer special discounts, encourage upsells and cross-sells, and provide helpful content.
Insert value-giving content in your email blasts from time to time, such as infographics, industry tips, blogs, or simple thank-you messages to show you your gratitude.
Monitoring, reporting, and increasing customer lifetime value are all critical activities for any business.
What’s your ecommerce business’ customer lifetime value like at the moment? What are some strategies you can start implementing to increase that value?
By implementing the abovementioned strategies, you can ensure your customers remain loyal and continue doing business with you for the foreseeable future.
Even after increasing CLV, your profits could be low if your customer acquisition cost (CAC) is high. Learn more about what CAC is and how to calculate and reduce it!
People Also Ask
What Is the Relationship Between Customer Retention Rate and Customer Lifetime Value?
Customer retention and lifetime value are both important indicators in customer relationship management.
The percentage of customers that continue to conduct business with a company, reflecting customer satisfaction and loyalty, is referred to as the customer retention rate.
Customer lifetime value forecasts the total revenue a customer will provide for a company over their lifetime, indicating each customer's potential value.
A greater customer retention rate might result in a higher customer lifetime value since satisfied customers are more likely to conduct business again and create more money over time.
Should CLV Be High or Low?
It depends on the context and the goals of a company.
In general, you would want a high CLV because it means that each customer is generating a significant amount of revenue for the company over the course of their lifetime.
It can also indicate that customers are loyal, satisfied, and likely to continue doing business with the company.
However, in some cases, a low CLV may be acceptable or even desired.
For example, if a company specializes in low-cost products with low margins, it may be more feasible to have a lower CLV as long as the company can generate enough revenue from a large volume of customers.
What Are the Main Factors that Affect CLV?
Several factors can affect customer lifetime value (CLV), including:
- Customer acquisition cost: The cost of acquiring a new customer can have a big impact on CLV, as it reduces the amount of money a company has to spend on retaining and serving that customer.
- Customer retention rate: The longer a customer stays with a company, the more money they are likely to spend over time, so retaining customers is crucial to maximizing CLV.
- Customer purchase frequency: If customers buy more frequently, they will likely generate more revenue over their lifetime, so increasing purchase frequency can boost CLV.
- Customer spending per transaction: If customers spend more money per transaction, they will generate more revenue over their lifetime, so increasing the average transaction value can boost CLV.
- Customer profitability: If a customer is more profitable than others, they are likely to generate more revenue over their lifetime, so targeting profitable customers can boost CLV.
- Customer referrals: If a customer refers new customers to a company, it can increase CLV by lowering the cost of customer acquisition and by generating additional revenue from the new customers.
- Product or service quality: If a company's products or services are high quality, customers are more likely to stay with the company, buy more frequently, and refer others, all of which can boost CLV.
These are just some of the main factors that can impact CLV, and different companies will have different CLV drivers depending on their business model and customer base.
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