Customer Lifetime Value: How Ecommerce Businesses Use CLV
Customer Lifetime Value represents the total amount of revenue a business can expect to generate from a single customer throughout their entire relationship with the company. In this article we analyze how to calculate CLV, but most importantly, how ecommerce businesses optimize it.
In the world of ecommerce, understanding your customers is crucial for driving store success, and one key metric that should never be overlooked is the Customer Lifetime Value (CLV). So, what is CLV, and why is it so important? Let's dive in!
Customer Lifetime Value represents the total amount of revenue a business can expect to generate from a single customer throughout their entire relationship with the company. In simple terms, it's the long-term value of a customer, as opposed to their immediate worth from a single transaction. CLV is a critical metric for ecommerce businesses because it helps you see beyond individual sales and focus on nurturing long-term, profitable relationships with your customers.
For newer store owners or store owners who are beginning to optimize their business, it can be a difficult metric to calculate. There are also many variables that go into CLV, making it tricky to optimize and focus on improving. Throughout this article, we will analyze how ecommerce businesses can calculate, leverage, and improve their customer lifetime value.
Calculating Customer Lifetime Value
Calculating CLV might seem like a daunting task, but don't worry - it's easier than you think! At its core, the basic formula for CLV calculation involves three key components: average purchase value, purchase frequency, and customer lifespan. Here's the formula to help you crunch those numbers:
CLV = (Average Order Value) x (Purchase Frequency) x (Customer Lifespan)
Let’s break down those components in more detail:
Average Order Value (AOV): This refers to the average amount spent by a customer in a single transaction. To calculate the APV, simply divide the total revenue generated by your business over a specific period by the number of transactions made during that period.
Purchase Frequency (PF): This is the average number of times a customer makes a purchase within a specified time frame. To calculate PF, divide the total number of transactions by the number of unique customers during that time period.
Customer Lifespan: This represents the average length of time a customer continues to do business with your company. To calculate customer lifespan, you'll need to analyze historical data to determine the average time between a customer's first and last purchase.
Having one global CLV metric can be useful, but its usefulness is limited. Segmenting your customers based on their CLV can help you identify which groups are most valuable to your business. Here are a few methods for doing so:
Percentiles: Divide your customer base into percentiles (e.g., top 10%, top 20%, etc.) based on their CLV. This will help you identify your highest-value customers and allocate resources accordingly.
CLV Tiers: Group your customers into tiers based on their CLV, such as "low," "medium," and "high" value. This approach allows you to tailor marketing and retention strategies for each segment, ensuring that you're meeting their unique needs.
RFM (Recency, Frequency, Monetary) Analysis: This method involves segmenting customers based on their recency of purchase, frequency of purchases, and total monetary value. By combining these factors, you can create a more nuanced view of your customer base, allowing for better-targeted strategies.
With the basic CLV formula and some segmentation methods covered - you might be wondering how to gather the data points needed to try this yourself. Let’s cover that next!
Collecting Data For Calculating Customer Lifetime Value
Data collection and analysis are the cornerstones of understanding and optimizing Customer Lifetime Value (CLV) for your ecommerce business. In this section, we'll discuss the essential data points to collect, and with platforms to use.
To effectively calculate CLV, you need to gather the right data. Here are the key data points to consider:
Purchase history: Track the amount spent by customers in each transaction, along with the date and frequency of purchases. You will want to gather your AOV & PF from Shopify, Google Analytics, or even Klaviyo or your CRM of choice.
Customer retention rate: Determine the percentage of customers who continue to make purchases over a specific time period. You can also think of this as the number of average transactions a customer will make with your store (PF).
Customer churn rate: Assess the percentage of customers who stop making purchases during a given time frame. Tools like Klaviyo have great customer churn rate calculations within their analytics dashboards. This will help inform your customer lifespan.
Remember the CLV formula:
CLV = (Average Order Value) x (Purchase Frequency) x (Customer Lifespan)
Try collecting the data needed to calculate your CLV using the formula above, and then apply it again to a few segments of your customers. Understanding your ecommerce business's customer lifetime value will have you well-equipped to make informed decisions that drive growth and success. In particular, we imagine you may want to increase your CLV - let’s cover that next.
Strategies For Increasing Ecommerce Customer Lifetime Value
First a quick disclaimer - we could probably write a book on this entire section (maybe one day we will!) - so we’ve kept each point intentionally short. These are some quick ideas, intended to help you draw connections between your own marketing and growth efforts and optimize your store’s CLV. As we develop content around some of these concepts, we will update this article and add links where you can find more in-depth strategies and tactics.
Like the three components of the CLV formula, there are three groups of strategies to consider: improving purchase frequency, improving average order value, and lengthening customer lifespan.
If you are focused on improving purchase frequency, consider:
Personalized marketing campaigns: Tailor marketing messages based on customers' preferences, browsing history, and purchase behaviour to create a personalized experience. Consider how you might automate some of these campaigns through email or SMS flows.
Loyalty programs and incentives: Implement rewards programs, exclusive discounts, or membership benefits to encourage repeat purchases and increase customer loyalty. Using CLV segments you should be able to identify your medium & high-value customers - build triggers for when these customers enter this tier and reward them!
Exceptional customer service: Offer responsive and empathetic support, addressing customer concerns promptly and effectively to build strong relationships and trust. Great customer service and support experiences can turn a one-time shopper into a loyal, lifetime shopper - don’t neglect this.
If you would like to improve your average order value:
Offering bundled products and discounts: Create special offers that combine products or services at a discounted rate, enticing customers to spend more in a single purchase.
Consider shipping rates: A tactically chosen free shipping tier can improve your average order value by leaps and bounds. Often times we will set a free shipping tier 15-20% higher than the current AOV in an effort to incentivize customers to build bigger carts.
And finally, if your priority is lengthening your customer lifespan:
Proactively addressing churn risks: Identify factors that may lead to customer attrition and develop strategies to address them, such as improving product quality or addressing service issues. A big one that often goes under-considered is the product unboxing experience!
Engaging customers throughout their journey with quality content: Maintain consistent communication with customers through email, social media, or personalized content to strengthen their connection to your brand. Don’t just spam though - great ecommerce content is a mixture of product recommendations and valuable, interesting content that is built for your target audience.
Re-engaging dormant customers with targeted campaigns: Use targeted email campaigns, special offers, or personalized incentives to re-engage customers who haven't made a purchase in a while, reigniting their interest in your business. It’s also important to identify when this doesn’t work, and remove uninterested dormant customers from your marketing lists.
Try implementing some, or all of the above strategies to start optimizing and improving your ecommerce business’s customer lifetime value.
In conclusion, understanding and analyzing customer lifetime value (CLV) is essential for the success of any ecommerce business. By thoroughly examining CLV, you gain valuable insights into your customers' behaviour, allowing you to make informed decisions about marketing, customer retention, and product development.
We hope this guide has provided you with the necessary tools and strategies to optimize your business practices. By focusing on high-value customers and implementing the tactics outlined in this article, you can drive sustainable growth and profitability for your ecommerce venture. Remember that consistently monitoring and adapting your approach to CLV will yield the best results. Keep learning, experimenting, and refining your strategies to stay ahead of the competition and build lasting relationships with your customers.
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