What Is Customer Lifetime Value And Why Is It Very Important

Customer lifetime value is one of the most important ecommerce metrics. It provides a picture of the business long-term and its financial viability. High CLV is an indicator of product-market fit, brand loyalty and recurring revenue from existing customers. It is recommended that ecommerce businesses monitor and optimize customer lifetime value if they are looking for steady growth. Although it widely varies across categories, of course, the average CLV for ecommerce brands is $168. 

Defined: Customer Lifetime Value

Customer lifetime value is the total revenue you as an ecommerce business earn from a customer over time. It takes into account all their orders ever. It is a good metric to size up customer satisfaction, loyalty and the viability of a brand. 

Calculating Customer Lifetime Value 

There are two ways of calculating CLV, depending on what data you have available.

1. Accumulated data method

If you have historical sales data, this method is far more accurate. It puts together all orders by individual customers to get their own real CLVs. In case your business has been operating for some time and you only now decide to start monitoring customer lifetime value, some ecommerce analytics tools are able to pull this historical data by customer back since your day 1. The formula would look like this:

CLV = Order 1 + Order 2 +……+ Order n    (where n is the number of orders)

2. Average estimate method

If you don’t have granular data, you can estimate an average by the following formula:

CLV = AOV x n 

It takes the average order value and the average number of orders you receive from each customer. This method gives you an estimate if you are just launching your ecommerce store and only have industry data yet as well.

Why Is CLV So Important?

CLV is at the heart of financially stable ecommerce businesses that can grow organically and sustainably. This is because CLV is long-term, repeating the benefits of better ROI and unit economics. It is an entirely different strategy than going for short-term sales. The problem is acquisition-based growth needs constant marketing spending and you only grow as much as you can spend - think Facebook ads and Google adwords.

1. It impacts the bottom line. 

Your total customer lifetime value impacts your profitability. If you only work for conversions, relying on new customers, that requires you to pay the cost of acquisition every time, getting a smaller margin from each sale. Optimizing for CLV means getting repeat orders from customers you already acquired so no need to pay for them again. You would get the full profit margin of all orders after the first one, making up for the CAC you paid initially. Thus, your ROI increases. 

2. It means a steady cash flow.

Getting repeat orders from existing customers brings in a healthy cash flow regularly into the business. So you don’t need to worry about at least a part of your costs. It is easy to project and keep up with your payments due when you know money is definitely coming in. 

3. It lets you acquire more of your target customers.

When you know a customer will spend $100 instead of $10 with your business over the course of time, you can plan a different acquisition budget. You can spend more to reach the perfect target group. Maybe a competitor was outbidding you on keywords before or worked with big influencers you could not afford. In turn, the quality leads will probably turn into loyal customers, strengthening your brand and getting you high customer lifetime value.

4. It lets you grow.

With a bigger margin, you can reinvest more back into growing the business. Expanding overseas, developing new products or hiring sales consultants is more doable with the security of recurring revenue. 

5. It means customers love your brand and products.

A high customer lifetime value indicates people shop a lot from you. They seem to be satisfied with the service and quality so your products must be good. And most importantly, they are brand loyal so you have a chance for growing even more. This is something investors love to hear, if you decide to seek funding.

Ways to Maximize Customer Lifetime Value

From the formulas for calculating CLV it is clear that increasing the customer lifespan, the order frequency and the order value will lead to an increase in CLV as well. Ideally, it all is the result of customer retention and brand loyalty, not just sales tricks. Here are a few ways to drive lifetime value while building a meaningful relationship with your customers.

1. Keep customers for longer. 

Customer retention is about adding value for your customers, helping through your brand. So your marketing should inform, educate, inspire and relieve instead of sell directly. Send emails with information and various uses of the product bought to make them use it more effectively. Treat long-standing customers with special care. Use content marketing to entertain between orders. Segment customers by interests, tastes or preferences - whatever fits your products - and customize offers reaching them. Also, use feedback as a chance to connect, discuss, learn and improve - it keeps people coming back despite an occasional mishap. All these communications add to the shopping experience and strengthen customer’s trust in the brand.

2. Stimulate more frequent orders.

Sometimes it is hard to keep people coming back for years due to the nature of your products. For example, if you sell baby products, people will move out of your target group in about three years if they don’t have another child. So getting frequent orders is another way to drive customer lifetime value when the lifetime is not that long itself. Follow up browse abandonment sessions when they visit your site but don’t buy anything with tailored offers. Send reorder reminder emails so they don’t wake up to no coffee or no deodorant one day. You can even put little surprises in the boxes to make every order exciting. Coupons for next order are also great to speed things up. 

3. Push for bigger order values.

Bundles easily make bigger basket size because they are a deal. A simple analysis can     tell you what products people buy together to bundle up for a desirable offer that makes sense. Another way is to offer freebies with orders over a certain value as a token of appreciation. Last, categorizing products by use or occasion, not just kind, might help people discover various accessories and complimentary items to make their life easier.

Conclusion 

Customer lifetime value goes hand in hand with customer retention, satisfaction and brand loyalty. It is the financial benefit of having repeat customers. Ecommerce businesses with high CLV are able to grow more independently of ad costs and enjoy a stable cash flow.