How to Calculate Customer Lifetime Value In eCommerce?

In eCommerce, the relationship between brands and customers shouldn’t end with a sale. In fact, if you are implementing forward-thinking practices in your business, the first sale will be the beginning of a long and prosperous relationship. To do so, you need to understand customer lifetime value and take action accordingly. 

Key Takeaways

• Customer satisfaction is key to a good customer lifetime value. Work on optimising customer experience.
• CLV is an asset that will enlighten you about the success of your current business decisions and clear the way for better ones you’ll make in the future.
• CLV is correlated with several other metrics; hence it’s a comprehensive metric which gives you an in-depth analysis of your business.

What is Customer Lifetime Value? 

It is essential to know what each customer is worth to your business and understand the success rate of your current strategies. Customer Lifetime Value is a metric that grants you that knowledge and  shows the amount of value a customer is expected to bring to your business over time.

CLV is a great asset and key to making financial forecasts and addressing any budget concerns. It gives you insight into many areas of your business and provides the knowledge to be projected onto your future business decisions. 

How to Increase Customer Lifetime Value?

To increase your CLV, you must first ensure that your customers leave your eCommerce store satisfied and are inclined to repeat the purchase. Show your customers that you care about their journey, from when they visit your store until after the check-out. Implement effective ways to remind them of your store and build a strong relationship with them. 

Increase Customer Retention 

A good CLV depends on the frequency of purchases made, and the amount of revenue generated, by the customers. When a customer repeats their purchase within a reasonable period of time, that means they are retained. And the higher the retention rate, the better your CLV is. So, improving your retention rate should be the first thing to consider on your way to a good CLV.

Build Relationships with Customers 

Having retained customers doesn’t mean that they will always keep coming to you. Turning your customers into loyal promoters will increase your CLV for good. By providing excellent customer service, you’ll develop a relationship with your customers and make them feel involved in your business.

Customers will feel connected to your business when they know they can always contact you regarding any aspect of their shopping journey, and see that their opinions and concerns are recognised. Get back in touch with them as soon as possible when they reach out to you and ensure they are satisfied with the service.

A strong online presence is the key to building and improving customer relationships. Social platforms are great ways to engage with current customers, raise your game, and attract larger audiences.

Reward your customers’ loyalty and show them that you appreciate their effort and the revenue they bring to your business.

Oh, don’t forget to take note of their feedback and use them in your favour to carry your business to an even better point.

Keep Your Offerings Going

Average Order Value is another metric that affects CLV to a great extent. Offer relevant products to customers’ initial purchases using upselling and cross-selling strategies. This will not only impact your AOV and, in turn, CLV but also provide an enjoyable shopping experience for the customer through personalised offerings that will meet the customers’ needs, making them come back to you. 

Bundles on the listing and the basket pages, special discounts, and coupons are great ways to motivate customers to purchase more. Reach out to your customers via email and pop-ups to keep your offerings going even after the purchase is complete.  

All these can be performed through a good personalisation process. With our personalisation tools and Segmentify Analytics dashboard, serve your customers in the best way possible, analyse the success of your strategies and utilise those information for your benefit.

Metrics to Know Before Calculating Customer Lifetime Value

There are different ways to calculate CLV, but before we reveal them, there are several metrics you need to acknowledge and calculate first.

Average Purchase Value 

APV, also known as average order value, is the average value of each purchase your customers make. It is calculated by dividing your business’ total revenue in a specific time period by the number of purchases made during that period. 

Average Purchase Frequency Rate

APFR is the number of times a customer makes a purchase from your business during a period of time. You can calculate it by dividing the total number of purchases made during a certain time period by the total number of customers who made purchases throughout that period. 

Average Customer Value

Average customer value is the average amount of revenue a customer brings to your business in a certain period. Remember that it’s not the same as CLV. 

To calculate ACV, multiply the average purchase value by the average purchase frequency rate. You can also calculate customer value by subtracting total customer costs from the total revenue, and you’ll find the total customer value. 

Average Customer Lifespan

Before calculating CLV, you must consider how long a customer will keep purchasing from you. After that, you’re ready to calculate the average customer lifespan. To find ACL, divide the sum of customer lifespans by the number of customers. 

Customer Retention Rate

Customer retention rate shows the percentage of customers who remained as a business’ customers within a certain period. To calculate CRR, you need to subtract the number of customers that stood by you at the end of a given period from the number of customers you had at the beginning.

How Do You Calculate Customer Lifetime Value?

One of the simple ways to calculate CLV is by multiplying customer value by average customer lifespan. Another way is to multiply the annual profit a customer generates by the number of years they remain a customer of the business. Then you need to subtract the acquisition cost from the result. And voila! You have your CLV. 

Calculating CLV with Marketing and Acquisition Costs 

Marketing and acquisition costs are calculated by dividing any expenses made for acquisition and marketing by the number of new customers generated in that period. This will give you an insight into the success rate of the marketing and acquisition strategies you have implemented. Considering the result you get from that formula, you can make stronger and more beneficial marketing decisions. 

How Can You Use Customer Lifetime Value in Your Business? 

Use CLV to Make Marketing Decisions

When you know how much acquiring and retaining a customer costs you, it is easier and more effective to evaluate how successful your marketing strategies are and whether you should lower your acquisition costs. 

Use CLV to Inform Product Decisions

If your CLV doesn’t seem inspiring, you can consider improving your product roadmap and making decisions that align with your product goals.

Use CLV to Optimise the Customer Experience

Your CLV not aligning with your goals might mean your customers aren’t satisfied enough. Conduct a thorough analysis of the issue and optimise customer experience to improve your business’s retention rate. 

Wrapping Up

Customer Lifetime Value gives you insight into many areas of your business that might need improvements and changes. It also brings along information about other various metrics to help you both evaluate your current business strategies while also helping you shape future ones. 

You can improve your CLV by optimising customer experience by implementing strategies such as upselling and cross-selling, establishing ways to build strong relationships with them. Overall, if you pay attention, it will tell you a lot about your business.