24 jul 2023
Kelli is the senior content strategist for Order Protection.
When most people think about how to measure success in eCommerce, their first instinct is to look at sales and revenue. And while this isn’t necessarily a wrong approach, those metrics will generally only provide insight into the short-term, rather than helping to predict a business’s future success.
Instead, tracking metrics that measure the customer experience and the value of each customer is a much better way to determine both current and future success. In case you missed it, we covered eight of the most important customer experience metrics for eCommerce in another article. Now, we want to zero in on one of those metrics: customer lifetime value (CLV).
Understanding and maximizing customer lifetime value can be the key to long-term profitability and sustainability. Any eCommerce leader knows that your existing customers are your most valuable, and CLV helps track the health of those customers. For example, a high CLV can be an indicator of product-market fit, brand loyalty, and recurring revenue. And by optimizing your customer lifetime value, you can hope to achieve steady growth in the market.
In this article, we'll define customer lifetime value, why it's important, how to calculate it, and strategies to improve it.
What is customer lifetime value?
Before we dive into the nitty-gritty of CLV, let's first understand what it actually means. Customer lifetime value is the predicted net profit a customer will generate throughout their entire relationship with your business. In simpler terms, it's a measure of how valuable a customer is to your company over time.
Calculating customer lifetime value allows you to understand the long-term impact of acquiring and retaining customers. By knowing the value each customer brings to your business, you can make informed decisions about how much to invest in marketing, customer service, and other areas to maximize profitability.
The importance of measuring customer lifetime value
Knowing your customer lifetime value is crucial for several reasons. First, it helps you prioritize your marketing efforts. By identifying your most valuable customers, you can focus your resources on retaining and satisfying them, rather than spreading yourself thin trying to cater to everyone.
Second, customer lifetime value provides insights into your business's financial health. By understanding how much revenue each customer generates over their lifetime, you can make more accurate revenue forecasts and plan your budget accordingly.
Finally, calculating customer lifetime value helps you assess the effectiveness of your business strategies. If your CLV is increasing over time, it indicates that your efforts to improve customer satisfaction, loyalty, and retention are paying off. On the other hand, a declining CLV may signal the need for adjustments in your business approach.
How to calculate customer lifetime value
Now that we’ve covered the importance of customer lifetime value, let's look at the process of calculating it. There are several methods to calculate CLV, but one of the most common approaches looks like this:
Determine the average order value (AOV): Calculate the average amount a customer spends each time they make a purchase from your business. To figure out your AOV, take your total revenue and divide it by your total number of orders.
Calculate the average purchase frequency: Determine how often, on average, a customer makes a purchase from your business within a specific timeframe (e.g., a month or a year). Make sure that when calculating this number, you use the same timeframe that you used in your AOV calculations in order to get an accurate result. Using that timeframe, divide your total number of orders by your total number of unique customers to get the purchase frequency.
Estimate the customer value: This figure represents the average monetary value each customer contributes during a specific timeframe. To get this number, multiple your AOV by your purchase frequency.
Multiply the customer value by the average lifetime value: Now that you have the customer value, you can find the CLV by multiplying the customer value by the average customer lifespan. This value is the length of time that your relationship with a customer lasts before they become inactive and stop making purchases with your brand.
By using this formula and plugging in the relevant data from your business, you can get a rough estimate of your customer lifetime value.
Now, let’s put the formula into practice. For this example, let’s say your eCommerce store sells skincare products. We’ll keep the numbers simple in this exercise, so let’s say your total revenue per month is $100,000. To determine the average order value, we’ll take that total sales number divided by the total number of orders. In this example let’s say you get 1,000 orders per month.
$100,000 / 1,000 = $100
So your AOV is $100. Next, we’ll calculate the purchase frequency. For this we’ll take the total number of orders (1,000) and divide the total number of unique customers that shop with you each month (800).
1,000 / 800 = 1.25 (average order frequency per month)
Now we’ll find the customer value by taking the average order value multiplied by the purchase frequency.
$100 x 1.25 = $125. This tells us that each of your customers are valued at $125 per month.
Finally, to get the CLV, we’ll multiply the customer value by the length of time that they will shop with your brand. Let’s say that in general, you retain customers for about two years, or 24 months.
CLV: $125 x 24 = $3,000
Strategies to improve customer lifetime value
Now let's explore some strategies to maximize CLV. By focusing on these strategies, you can not only increase your customer lifetime value but also create a loyal customer base that will keep coming back for more.
Provide exceptional customer experiences
One of the most effective ways to improve customer lifetime value is by providing exceptional customer experiences. When customers feel valued, heard, and satisfied with your products or services, they are more likely to become loyal advocates for your brand. This can lead to repeat purchases, higher order values, and positive word-of-mouth referrals, all of which contribute to higher customer lifetime value.
To provide exceptional customer experiences, invest in training your customer service team to deliver personalized and attentive service. Respond promptly to customer queries and concerns, and go above and beyond to exceed their expectations. A focus on the post-purchase journey like providing shipping protection or shipping insurance can go a long way in enhancing the overall experience a customer has with your brand as well.
In fact, research shows that 78% of customers would actually be inclined to spend more with online brands if offered protection or warranties and checkout. Remember the CLV formula from before? When your customers feel comfortable spending more knowing that their orders will be protected from loss, damage, or theft, that bumps up the average order value (AOV), ultimately boosting the CLV as well.
By making each interaction with your customers memorable and delightful, you can build long-lasting relationships that drive up your CLV.
Increase customer loyalty and retention
Another powerful strategy to improve customer lifetime value is to focus on increasing customer loyalty and retention. It's much more cost-effective to retain existing customers than to acquire new ones, so nurturing your current customer base should be a top priority.
Offer incentives, such as loyalty programs (which we'll get into more below) or exclusive discounts, to encourage repeat purchases. Send personalized emails and offers to show your appreciation for their continued support. Regularly engage with your customers through surveys or feedback requests to gather insights and address any potential issues proactively. By building strong relationships with your customers and keeping them engaged, you can foster loyalty and extend their lifetime value.
Cross-selling and upselling techniques
Cross-selling and upselling are effective techniques to increase the average purchase value and subsequently boost customer lifetime value. Cross-selling involves offering complementary products or services to enhance the customer's initial purchase. For example, if a customer buys a camera, you can suggest additional lenses or accessories.
Upselling, on the other hand, involves encouraging customers to upgrade to a higher-priced product or service. By highlighting the benefits and added value of premium options, you can entice customers to spend more.
To implement cross-selling and upselling effectively, analyze your customer data to identify patterns and preferences. Tailor your recommendations based on their past purchases and provide compelling reasons to upgrade or add on. By strategically offering relevant products or enticing upgrades, you can increase the average purchase value and maximize customer lifetime value.
Personalization and targeted marketing
Today’s customers expect personalized experiences and relevant offers. By leveraging customer data and implementing targeted marketing strategies, you can enhance customer engagement and boost customer lifetime value.
Segment your customer base based on demographics, purchase history, or preferences, and create tailored marketing campaigns for each segment. Use personalized email marketing to send targeted promotions and recommendations based on individual customer behavior. Leverage social media platforms to engage with customers on a personal level, responding to their comments and messages promptly.
By delivering personalized experiences and targeted marketing messages, you can make your customers feel understood and valued. This, in turn, increases their loyalty and likelihood of making repeat purchases, ultimately maximizing customer lifetime value.
Implement a customer loyalty program
A customer loyalty program is a tried and tested method to improve customer lifetime value. By rewarding customers for their loyalty, you can incentivize them to continue choosing your brand over competitors.
Design a loyalty program that offers enticing rewards, such as exclusive discounts, early access to new products, or freebies. Make it easy for customers to earn and redeem rewards, and ensure the program aligns with your brand values and customer preferences.
Promote your loyalty program through various channels, such as your website, social media, and email marketing. Regularly communicate with your loyal customers, keeping them informed about new rewards and special offers. By nurturing their loyalty and making them feel appreciated, you can increase customer lifetime value and create brand advocates who will spread the word about your business.
Measuring and tracking customer lifetime value
Like any strategy, it's essential to measure and track your performance and progress. Regularly monitoring your CLV allows you to assess the impact of your efforts and make data-driven decisions to further optimize your business strategies.
Utilize customer relationship management (CRM) software to track individual customer behavior and transactions. This will provide you with insights into their purchasing patterns, preferences, and overall value to your business. By analyzing this data, you can identify areas for improvement and tailor your strategies accordingly.
Additionally, survey your customers to gather feedback on their experiences and satisfaction levels. This qualitative data can complement the quantitative data provided by your CRM system, giving you a holistic view of your customers' perceptions and needs.
By continuously measuring and tracking customer lifetime value, you can identify trends, spot opportunities for growth, and make informed decisions to maximize your business's success.
Customer lifetime value is indeed the holy grail of business success. By understanding its significance, calculating it accurately, and implementing strategies to improve it, you can unlock the full potential of your business. Providing exceptional customer experiences, increasing customer loyalty and retention, utilizing cross-selling and upselling techniques, personalizing your marketing efforts, and implementing a customer loyalty program are all powerful ways to boost customer lifetime value. So, take these strategies and put them into action, and watch as your business thrives and prospers in the long run.