The Customer Lifetime Value, abbreviated as CLV or LTV (for “lifetime value”) is one of the most important pieces of data for your digital business.
Most people who work in the e-commerce sector are familiar with notions like the cost of acquisition or the conversion rate because we are harassed by stories and theories about a recurring problem:
How do we acquire new customers?
But Lifetime Value focuses on another equally vital issue:
How much do my clients bring in to me in the long run?
The goal of the CLV is to take into account your customers’ loyalty and retention to calculate the turnover (or profit) that a customer will generate during his or her “life” on your site.
The customer lifetime value is essential since it allows us to predict our turnover over the long term and to adjust our marketing or acquisition budget in consequence.
If you thought that the cost of acquisition was calculated based on a single hypothetical purchase, here is some data that will surely make you change your mind.
How do you calculate your customer lifetime value?
There are several formulas for calculating the LTV. However, many of them are complicated and time consuming to put in place.
But don’t panic!
There is a simpler way to calculate your LTV.
For this, you will need some bits of data from your business:
- The average cart
- Purchase frequency
- The customer value
- The average customer lifespan
To make your calculations easier, use the above indicators over the same period of time: 1 year, preferably.
The average cart is just turnover divided by the number of orders. It’s the average value of a purchase on your site.
Average cart = Turnover / Number of orders
Purchase frequency is a piece of data that allows you to understand how many purchases are made by the same customer during a given period. This is essential since it tells you how many purchases your unique customers make over a given period of time and whether your customers tend to make new purchases on your e-commerce site.
Use the following formula:
Purchase frequency = Number of orders / Unique customers
Customer value is the average value of your shopping cart multiplied by the average purchase frequency of your customers over a given period. It’s the multiplication of the two pieces of data that we have just explained:
Average cart X Purchase frequency
Customer average lifespan
The customer average lifespan is the last piece of the puzzle. However, it is also the most complicated to understand because it depends on the type of activities you occupy.
Generally speaking, the customer average lifespan is considered to be between 1 and 3 years. However, this piece of data will change depending on your business model: do you offer a subscription service or a one-time purchase?
If your business is a very occasional niche, consider a lifetime of between 1 and 2 years. If you are working on a clothing or decoration brand and your designs are renewed regularly, you can take 3 years as a basis for your calculations.
Calculating the Customer Lifetime Value (FINALLY!)
Now that we have prepared all the data we need, it’s time to finally discover how much our customers are bringing in during their lives on our site! Here is the formula:
Customer Lifetime Value = Client Value X Average Lifetime
By multiplying the value of a customer over a year (average cart x number of purchases) by the average lifetime of your customers (1-3 years), you obtain the turnover that a customer brings in during his or her period of activity (1-3 years) on your e-commerce site.
Some calculation variants (for those who like to suffer)
Before going on to the 5 concrete methods to increase your Customer Lifetime Value, here are some variants of calculating the CLV for those who would like to push the analysis a little further:
- CLV expressed in profits: on the same basis as the calculation that we have just made, you can reason in terms of profits rather than in terms of turnover. For this, simply replace the monetary data (previously expressed in turnover) by the profit generated by purchase.
- CLV expressed in segments: to further analyze your customers’ behavior, you can analyze the CLV for each segment. For example, you can calculate the LTV for each of your acquisition channels, each demographic or geographic profile, etc. The possibilities are endless, and we can only advise you to push the analysis further.
5 practical methods to increase customer lifetime value
You now have a reliable method to calculate your CLV.
The goal is to increase this customer lifetime value to make each customer more profitable.
While a customer can be expensive to acquire, there are several ways to increase the “customer value” and thus increase the profits from each customer.
Focusing too much on acquiring new customers, and we forget that, according to BusinessInsider, regular visitors are twice as likely to put an item in their cart as new visitors.
Similarly, it is important to know that regular visitors have a lower bounce rate and a better conversion rate compared to new visitors.
Improving your LTV means working on the purchase experience and tunnel, customer service, and brand loyalty.
In short, working on the entire customer lifecycle to maintain a connection with your brand for as long as possible.
The goal is to get your customers to come back to your site and make a new purchase as many times as possible. For this, we can suggest five concrete methods to apply as soon as possible:
BOOST YOUR PURCHASE EXPERIENCE
It is often said that the first and the last impressions are the ones that matter most. This is especially true in e-commerce.
To increase your chances of leaving a good impression on your visitors (so they become loyal customers), it is vital that you offer the most enjoyable and smoothest shopping experience possible:
- Set up a discussion system to answer your customers’ questions
- Offer free assistance and documentation (articles, guides, etc.) to help your visitors make their choice.
- Explain clearly what added value you bring to your customers; what do you do better than the competition?
- Treat your customers with love: coupons, loyalty program, etc.
On the PandaDoc site, the company offers an academy for training on topics related to their core business.
CREATE A STUNNING NEWSLETTER
Many shopping sites’ problem is that once the purchase has been made, they lose contact with their customers and rely on luck to have them buy again.
It’s exactly what not to do.
A newsletter (certainly not a new solution, but it’s still effective) lets you keep in touch and serves as a way to convince your old customers to come back. We have already talked about retargeting (email advertising and reactivation programs) in a previous article.
Do you have a new collection coming out that you think your customers will love? Talk about it! Do you have special offers for Christmas or Black Friday? Talk about it! Did you create a super buying guide for single men? Talk about it!
- Send emails on a regular basis
- Create content with real added value for clients
- Test your email “Titles”, “Subject”, and “Body” (email A/B testing)
USE UPSELLING AND CROSS-SELLING
To build customer loyalty and increase your average shopping cart, there’s nothing like offering additional services and products.
Amazon does this brilliantly, and its premium program gives access to a premium delivery service, exclusive discounts, and a video catalog with a subscription.
The idea: keep the customer close to the brand for as long as possible.
INVOLVE YOUR CUSTOMERS IN ALL ASPECTS
To increase the customer’s lifespan in your business, there’s no secret: you must stay in touch and even seek interaction wherever possible.
The key idea: create as many interaction points in line with your business:
- Analyze your visitors online and offline activity: what do they do? Where can you find them?
- Respond to the problems they have and create content to solve their problems: are they looking for an apartment in New York? Write up a guide to real estate in NYC and share it through all the channels where they are present.
- Create a dialogue between you and your customers and encourage them to express themselves: organize competitions, quizzes, publish customer testimonials, etc.
BECOME A CUSTOMER SERVICE ROCKSTAR
Customer and after-sales service are two very powerful levers to increasing customer lifetime value.
In many cases, these are the two services that transform a recent customer into a future loyal customer:
- Am I satisfied with my purchasing experience?
- Did the product or service meet my expectations?
- I had a problem with the product/service: did the brand take care of it?
By working on these levers, you increase your chances of converting your one-time buyers into regular customers: you maximize your future profits while guaranteeing a regular working capital that is much more predictable than if you have to question your acquisition budget every month.
- Listen to your customers, even the most demanding ones
- React quickly: don’t let returns or complaints linger
- Publish educational and informative content
- Learn from your customers, ask for feedback
- Reward loyalty: offer benefits to your best customers
- Be transparent about the problems you encounter
The banking application Revolut offers a chat service within their application to quickly respond to users’ problems in a very personal way.
Quantifying results when trying to increase your customer lifetime value can be difficult.
You do not see the effects of your changes immediately and can sometimes wait weeks or even months for your customers to spend more or more on your site.
We want to test several solutions at once and sort out what works and what does not work. That’s where A/B testing comes in. Read our complete guide to A/B testing to learn more.