Customer Lifetime Value: Everything You Need to Know About This Crucial Metric (& Why You Should Care)
When you hear advice about how to improve your eCommerce brand’s customer lifetime value, do you nod your head but secretly wonder what it means?
It’s okay; you’re not the only one.
Many new and established online brands focus more of their attention on metrics like customer acquisition, social media ad spending, and other key performance indicators (KPIs).
So why should you care about customer lifetime value (which is sometimes abbreviated as Customer LTV or even CLV for short)?
As you’ll learn in this guide, CLV is one of the most important metrics to watch. It can benefit your company in a number of different ways, such as helping you lower customer acquisition costs, improving your marketing efforts, and much more.
Here’s the thing: learning how to calculate your CLV and putting it to good use takes a bit of practice. So we’re diving 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 square one:
What is Customer Lifetime Value?
Customer lifetime value measures how much revenue you can anticipate a typical customer bringing to your company over the course of your relationship.
This business metric essentially estimates what 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 in the future with your company, there’s a customer lifetime value formula to help you determine this.
Based on stats such as your average monthly transactions, gross margin, and more, you can calculate CLV and gain incredible insights to help your team make better decisions in the short- and long-term.
But that’s only the beginning of CLV’s superpowers.
Why is Customer Lifetime Value Important for eCommerce Businesses in Particular?
Is it better to keep engaging with one customer or put more effort into attracting five new customers?
While you may think your business needs all the new customers it can snatch up (partially true), you shouldn’t put all your eggs in this basket at the risk of losing a single existing customer.
Why? Because it’s always cheaper for your brand to sell to existing customers than to sell to new leads.
New customers take far more convincing to buy from your company, and this effort comes at a cost to your business. Further, you may never recoup this expense if they choose to go with your competitors instead.
That’s why selling to customers who already know, trust, and love your brand is a much easier sale. These customers already gave you their hard-earned money because they believe in your product/service and mission.
So would you risk losing these customers just to potentially gain a new one?
Your CLV can help you weigh the risks and:
- Put your marketing budget to better use.
- Lower acquisition costs for new customers.
- Focus on delivering exceptional experiences for the core segment of customers that matter most to your brand.
All these perks allow your brand to generate more revenue while saving money in the process. That’s a win-win in our book.
So now that you know more about the importance of customer lifetime value and the power it holds, let’s dive into:
How to Calculate Customer Lifetime Value (CLV)
There are a few different ways to determine your customer lifetime value, including traditional, historic, and predictive lifetime value formulas.
We think the predictive lifetime value formula is the most effective and easy to calculate, so we’ll be focusing our time on that one today.
With predictive CLV, you’ll use your customers’ previous buying behavior to help you better predict their future actions. It’s like having a crystal ball, if that was such a thing in business.
Predictive CLV doesn’t just guesstimate what a customer might do; it uses your own business data to paint a realistic picture based on stats.
The formula for predictive CLV is as follows:
CLV = T x AOV x ALT x AGM
Here, you’ll need to know:
T = Your average monthly transactions
AOV = The average order value
ALT = The average customer lifespan in months
AGM = Your average gross margin
Let’s put this formula to work and see what it looks like in action:
Computing Customer Lifetime Value Using an eCommerce Example
Sometimes it helps to put a high-level business concept like CLV into perspective using customer LTV examples.
So let’s say your eCommerce store sells and delivers locally grown flower arrangements. When you check out your prior sales data averages, you notice:
- A customer averages about 10 transactions per month (T)
- The average order is $75 (AOV)
- Customers usually stay with your brand for 24 months (ALT)
- Your average gross margin is 65% (AGM)
Plugging this information into the formula, you’ll see that:
CLV = T x AOV x ALT x AGM
CLV = 10 x $75 x 24 x 0.65
CLV = $11,700
So the average customer lifetime value for this company would be $11,700.
Now, your customer lifetime value benchmark could be much higher or lower than this, depending on your average transactions, gross margins, customer churn rate, etc.
Further, this formula is predictive, so it can change at any given time, but still provides a solid foundation on which to base your other budgetary decisions.
Again, this customer LTV example simply gives you an idea of how to do the math to find your long term customer value.
Keep in mind that you may need to do a bit more number crunching to get to the terms used in that formula.
For example, to calculate your average order value, you’ll need to divide your total revenue by the number of total orders you fulfilled. And determining your average monthly transactions will require you to divide your total number of monthly purchases by your total number of customers.
Your accounting or sales software should help you sort out this data. Then you can easily plug those figures into our formula, calculate your CLV, and move on to:
How to Increase Your Customer Lifetime Value
Whether the figure you just calculated is higher or lower than you expected doesn’t matter. What matters is that you can increase this number by implementing the following five strategies:
1. Start a Customer Loyalty Program to Maximize Your CLV
One of the best things you can do to increase your CLV is to take better care of your existing customers.
Keeping them happy and continuing to serve their needs should be your top priorities. You’ll ensure your tribe sticks around for the long haul and spends more with your brand (both of which factor into the CLV formula).
Customer loyalty software can help you create loyalty programs to boost customer engagement and foster brand advocates.
This powerful tool allows you to reward your best customers and provides them with incentives for continuing to shop with your business.
For example, using a points-based rewards program, customers can rack up points for engaging with your brand and making purchases.
Implementing rewards (such as $10 off their next purchase) for referring friends and family members will incentivize them to spread the good word about your brand and help lower your customer acquisition costs.
Lastly, but just as importantly, customer loyalty software programs like the one we just linked can help you identify your top customers within the analytics dashboard.
When you know this core segment of VIP customers, you can use this intel to make smarter marketing decisions, go after their dollars specifically, and take extra good care of them.
That’s why so many brands find customer loyalty software an incredibly valuable tool to optimize CLV, and one your brand would be crazy not to use.
2. Create a Better Onboarding Experience
On top of implementing a rewards program, it’s also crucial to revamp and maximize your onboarding experience to boost CLV.
Do new customers feel welcome, or are they just another sale that’s quickly pushed through your funnel like ranchers herd cattle?
The answer to this question can either help or hurt your CLV.
An outstanding onboarding experience welcomes customers with a big virtual hug. It makes them feel good about purchasing from your brand. And when this kind of first impression kicks off your relationship, your new customers are much more likely to stick around long-term.
To make your onboarding experience outshine your competitors’ experience, you can use the customer loyalty software tool we just mentioned to give new customers bonus points for their first purchase.
When they’re bursting with warm-and-fuzzy feelings for your brand, help them extend their good vibes to their friends and family by offering a discount on their next purchase if they refer your brand to others.
Follow these two tips, and you’ll likely see an uptick in repeat purchases and happy customers (which both raise CLV).
3. Offer Related Upsells at Checkout
Take a page out of Amazon’s book by giving both new and existing customers suggestions for products that go well together.
You could try bundling similar products or combining different ones that would complement each other.
Not only will this help increase how much people spend per purchase, but it may also help solve more of your customer’s problems. You can even take the opportunity to show them items they wouldn’t have found otherwise (but you know they’ll like).
So if you’re not already suggesting great pairings to your customers, this is another must-try idea.
4. Capture and Act On Customer Feedback
The next CLV strategy is one we hope you’re already using, but it’s still worth mentioning.
Keeping customers happy is a top priority, as mentioned earlier, and one way to ensure you’re doing that is to capture their feedback and make sure you’re actually using what they tell you.
While it can be a little harder to generate feedback, the effort will pay dividends since you’ll be able to better serve your customers.
Whether it’s coming out with new products, an update in features, or fixing common problems that frustrate people, implementing feedback will keep customers on-board and allow you to stay competitive.
Consider this intel like free market research; knowing what your customers want and delivering it all but guarantees they won’t run to your competitors.
5. Improve Customer Service Every Step of the Way
You’ll never raise your CLV if your customer service is severely lacking.
Customers won’t stick around if they have trouble reaching or dealing 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’s image. Just one bad experience could be enough for otherwise happy customers to jump ship.
So on top of getting and acting on customer feedback, take a closer look at your customer service teams to make sure they have everything they need to help customers.
See that you have enough support to handle your customer queries and that your team is available via email, phone, social media, real-time online chat, and anywhere else your customers choose to reach out.
If you can’t take an objective look at your customer service with fresh eyes, enlist a trusted outside source for help. Ask them to test what it’s like to interact with your customer support, and be open to hearing 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 puzzle, making it worth as much of your time and attention as it needs to become a well-oiled, super helpful machine.
Final Thoughts on Improving Your Customer Lifetime Value
While you may not have given much thought to your CLV before reading this guide, or you weren’t sure why it mattered so much, you should now see why it pays to optimize this metric.
From increasing revenue and brand loyalty to lowering your acquisition costs, there are plenty of good reasons to calculate, understand, and focus on your CLV moving forward.
So now it’s time to break out the calculators, crunch the numbers, and learn your CLV benchmark. Then you and your team can get started on these five strategies to optimize CLV starting today.
Wish you had more time to devote to your brand’s CLV? Check out the customer loyalty software mentioned earlier, and you’ll have an easy-to-use tool to do the heavy lifting for you!