What is customer lifetime value and why should you care?

What is a customer worth to you? Knowing the answer to that question is key to ensuring success and longevity for your business and that’s the concept behind customer lifetime value. Understanding customer lifetime value (CLV) means being able to use it to shape your plans. In the world of eCommerce, it’s easier than ever to get this data, track it and use the right tools to maximise it. But let’s go back to the start to understand what customer lifetime value is.

What is customer lifetime value?

Customer lifetime value is how much your average customer is worth to you across the course of their relationship with your business. In a nutshell, it’s the idea that your customers will keep coming back over and over because they’ve been so pleased with your products/services and customer service. It goes without saying that having a higher customer lifetime value is better because repeat customers are more valuable to your business. If your CLV is worryingly low, improvements need to be made. But there’s more to it than just an average figure, especially if you are prepared to dig into the data.

What are the benefits of focusing on CLV?

One hard and fast rule of business is that it’s preferable to retain customers rather than constantly trying to attract new ones. Retention requires less effort and less expense than attraction and it’s usually easier to predict. Focusing on CLV means focusing on customer retention and adding value for your customers so that they can be of greater value to you. Repeat customers can be the lifeblood of a business because they can bring a steady cash flow while also boosting your profit margin by costing less than new customers. This helps to reduce the size of your customer acquisition budgets. In turn, this gives you more money to invest in the business, while the additional data you get from lifetime customers can help you make the right decisions as well as keeping them happy and loyal. Understanding CLV can also help reduce your lifetime value (LTV) to customer acquisition costs (CAC) ratio, according to Shopify. Their research showed that the average CAC is between £100 and £370, depending on the industry. They recommend a ratio of 3:1 as a sign of efficient sales and marketing.

What metric is used to work this out?

But how do you calculate customer lifetime value? There are different models for achieving this. HubSpot picks two - Predictive CLV and Historical CLV. Predictive CLV is built upon machine learning to forecast the buying behaviour of your customers, allowing you to identify your most valuable customers, products and services. Historical CLV uses your existing data to predict the value of customers based on their average order value. A potential downside to this is that it doesn’t consider various reasons why existing customers might stop buying from you. If you’re looking for a simple way to calculate a customer lifetime value, try multiplying your average purchase value by the average number of purchases. Then multiply that by the average customer lifespan and you’ll have a customer lifetime value figure to work with. But that’s not all you can do with CLV. Shopify recommends segmenting your customers using RFM (recency, frequency and monetary value). Recency is the last time a customer made a purchase, with the assumption being that the more recent the purchase, the more likely another will be made soon. Frequency, of course, is how many purchases have been made within a time frame, with those customers making the most purchases seen as most likely to return. And finally, monetary value is about how much has been spent - you can probably work out how this relates to the likelihood of coming back for more. Segmenting this way helps you work out which of these factors has the greatest influence on your CLV. All this data is available within Shopify, which is a reminder of how crucial it is to find an eCommerce platform that empowers you to make informed decisions about your business based on website activity.

How can you increase your CLV?

Knowing how to increase customer lifetime value doesn’t need to be rocket science. There are a number of different steps you can take to ensure your customers feel valued and motivated to keep coming back to you for more of the same. Some of this is the basics of running a successful eCommerce business: offering good customer service by doing what you say you’ll do, when you’ve said you’ll do it. But beyond this, there are ways you can keep these customers buying from you.

Email marketing: This can start with the onboarding process after the first time they make a purchase. Get personal with email marketing and send a follow-up message with information about your brand, offers to thank them and encourage them to come back to your website. This can be the start of a connection and this email can set the tone for your future interactions.

Building a connection: Building up a positive and lasting relationship is a two-way thing, of course, and making customers feel valued sometimes means listening as well as broadcasting to them. Involving them in your decision-making processes through email feedback or social media polls - and being sure to publicise when these have made a difference - can help to engender the kind of brand loyalty that makes a big difference to CLV.

Upselling and cross-selling: Upselling and cross-selling are both important tools for any eCommerce strategy when they are done effectively. They can also boost your customer lifetime value because they can increase your average order value, with even small additions to each purchase adding up to greater profitability and CLV.

Encouraging UGC: You can also use your customers to showcase your products by building brand communities, encouraging them to leave customer reviews and sharing user-generated content on your site and social media. All of this helps engage existing customers and attract new ones, with minimum effort on your part.

Loyalty programmes: Increasing loyalty is important and another way to achieve this is by using loyalty platforms like Loyalty Lion, which offer rewards that increase your purchase frequency from repeat customers.

Omnichannel experience: Delivering an omnichannel experience is another powerful tool for customer retention. Knowing where your customers are in terms of social media is crucial as is delivering customer service that’s readily available. However a customer comes across your brand, their experience should be cohesive and responsive.

Customer lifetime value can take time to work out and to understand how best to interpret it for your eCommerce site, your products and your customers. However, it is still a hugely important metric for you to consider thanks to the many benefits of having loyal repeat customers. If you want to find out more about how to maximise your CLV at a time when a difficult financial landscape is making it hard for retailers to increase their revenue, why not get in touch and find out what we can do for you?