As an e-commerce business owner, you know that customers are the key to sales and profits. But how do you figure out which of your customers are going to be the most profitable? Which ones should you focus on keeping happy?
Customer lifetime value (CLV) is a metric that answers these questions by calculating how much profit each customer will generate over their lifetime as a result of their purchases from your store.
It helps you make better decisions about where and how you spend your marketing dollars and can help guide your strategy for building long-term relationships with customers.
In this article, we will discuss customer lifetime value and how you can calculate it as well as how to interpret the numbers for your business.
Customer lifetime value is a metric used to calculate the total value of a customer over the entire time they are associated with your company. It takes into account all revenue generated from that customer as well as the costs associated with acquiring and servicing them. CLV can be used to help businesses make decisions about how much money to allocate to customer acquisition and retention activities.
It’s important to calculate CLV because it gives you a better understanding of the value of your customers and how that value changes over time. This information can help you make more informed decisions about where to allocate your marketing resources.
Customer lifetime value is important in eCommerce because customer acquisition can be costly, and customer retention is critical to the success of any business. This means that it’s more expensive to acquire a new customer than retain an existing one, so understanding how much money you can expect to make from each customer over time helps you allocate your resources efficiently and maximize the return on investment of your customer acquisition activities.
*Why customer lifetime matters
This information is also important for customer-centric business models, such as subscription businesses and retailers with complex customer loyalty programs. Calculating customer lifetime value helps you identify the most valuable customers who are making a disproportionately large contribution to your revenue stream so that you can better retain them through targeted offers or incentives.
One of the benefits of utilizing CLV is that customer retention rates go up. In fact, according to a study by Bain & Company, companies who improve customer retention rates by just five percent can increase their profits by as much as 95 percent.
"Improving customer retention rates by just five percent can increase your profits by 25 to 95 percent." - The Value of Keeping the Right Customers, Harvard Business Review
This is because it costs significantly more to attract a new customer than to keep an existing one. According to a study by the Harvard Business Review, it can cost up to five times more to acquire a new customer than to retain an existing one.
*The 4 Keys to boosting your customer retention
When you retain a customer, they continue to buy from you over time. This not only increases your sales revenue in the short term, but customer lifetime value is a good indicator of customer loyalty and profitability. It shows the customer has strong brand affinity, which means they are less likely to shop elsewhere, so customer lifetime value is also an indicator of customer stickiness.
Cash-constrained businesses can use CLV to predict their expected cash flow based on customer lifetime value. They can use this information to project future cash flows and make investment decisions that will help them meet their operational goals. This gives customer-centric businesses the ability to make strategic growth decisions based on whether they can afford to acquire new customers.
(3) It allows you to find more targeted consumers.
Another benefit of customer lifetime value is that it can help you find more targeted consumers. By understanding how much revenue each customer generates on average, you can better allocate your customer acquisition resources towards attracting more customers like them.
You might, for example, seek out customers who spend $400 on average, rather than customers who spend $200 on average. This customer acquisition approach is known as customer retargeting and it’s used by many businesses to improve their customer lifetime value.
Acquiring a new customer might be expensive. It might involve giving away free products or services or investing in expensive marketing campaigns. But customer lifetime value can help reduce the costs of customer acquisition.
When you understand customer lifetime value, you know how much revenue a customer is going to generate over time. This means that if you can retain or acquire a customer for less than the amount they’re expected to generate over their lifetime, you come out ahead.
Customer retention has been shown to be more cost-effective than customer acquisition, so understanding your CLV can help you make informed decisions about where to focus your efforts.
Now that we’ve covered what customer lifetime value is and why it matters in eCommerce, let’s take a look at how you can calculate it.
Learn more by reading How to Calculate and Increase Customer Lifetime Value in Your Store - Shopify
There are several approaches to calculating customer lifetime value, and no one approach is perfect; therefore, you'll have to experiment with different customer acquisition and retention methods until you find the one that works best for your business.
The most important thing is to use the method that best suits your business and its customer base.
The customer lifetime value is calculated by multiplying the average customer revenue per year times gross margin %. This formula uses customer churn rate and customer lifespan in customer lifetime value calculation.
This customer lifetime value formula uses customer purchase average per year, a number of orders and order size to calculate customer lifetime value.
Now that you understand how to calculate customer lifetime value, it's important to know how to interpret the results.
(Average customer lifetime value) is the average amount of money a customer spends with your company over the course of their relationship with you.
This number can be used to make strategic decisions about how to allocate your resources in order to improve customer lifetime value.
If, for example, customer lifetime value is $500 and customer acquisition cost for a new customer is $300, then it makes sense to focus on strategies that improve customer retention, because you'll make more money over the long run by keeping your current customers than by acquiring new ones.
(Average customer lifetime value) can also be used to measure the success of your customer retention efforts.
If customer lifetime value increases after you implement a new customer retention strategy, then it's fair to say that the strategy was successful.
8 Highly Effective eCommerce Customer Retention Strategies
Now you know how customer lifetime value is calculated and interpreted. You can use customer lifetime value to make strategic decisions about how to allocate your resources. You can also use customer lifetime value as a way of measuring the success of your customer retention efforts. Keep in mind, however, that customer lifetime value is just one metric; you should always use it in conjunction with others to make informed business decisions.
No matter which formula you use, the calculation is based on a few basic assumptions:
Once you have calculated customer lifetime value, it is important to interpret the number in a way that makes sense for your business. CLV can be used to help answer questions such as:
You can also use CLV as part of your customer retention strategy to help you understand customer behavior over time. Knowing the customer lifetime can give you an indication of how much revenue a customer will generate before they churn, making it easier for you to set targets and monitor your progress toward meeting those goals.
The CLV metric provides value both at the aggregate level as well as by customer segment, depending on how customer data is organized.
Learn more by reading - How to calculate Customer Lifetime Value , Hubspot
Now that you understand customer lifetime value, it’s important to use the data to your advantage. CLV can help you answer critical business questions and make sound decisions about where to allocate your resources in order to maximize profits.
Here are a few ways you can use customer lifetime value data:
Learn more by reading What Is Customer Lifetime Value And Why Is It Very Important - BigCommerce
There are many companies using customer lifetime value in their customer acquisition and retention strategies. As mentioned above, customer retention has been shown to be more cost-effective than customer acquisition, so it’s no surprise that companies are focusing on ways to increase customer lifetime value.
Learn more by reading How Netflix Measures You to Maximize Their Revenue & How It Can Help Your Business
Once you have calculated customer lifetime value and understand its importance to your business, there are a few things you can do to increase loyalty and repeat purchases from customers.
By implementing some or all of these tips, you can increase customer loyalty and encourage repeat purchases, resulting in increased profits for your eCommerce business.
When it comes to customer lifetime value, upsell and cross-sell opportunities are some of the most important aspects to consider. Upselling is the process of selling a customer a more expensive version of an item they are already interested in, while cross-selling is the act of selling a customer an additional item that is related to the product they are currently looking at.
Upselling is a method of increasing customer lifetime value by encouraging customers to purchase an upgraded, more expensive version of a product they just bought. It's effective to use when you have a customer who has recently made a purchase and still has more money to spend.
Upsells are used to boost CLV for two primary reasons:
When done correctly, upselling can be an extremely effective way to increase customer lifetime value and boost your bottom line.
Cross-selling is a customer engagement strategy that encourages customers who have just made a purchase to buy related products. It's most effective when the customer care team has identified the customer's interests and needs and is able to recommend additional products that will satisfy those needs.
Cross-selling is a customer engagement strategy that encourages customers who have just made a purchase to buy related products. For example, if a customer buys a new shirt, you might suggest they buy a new pair of jeans to go with it.
When done correctly, upselling and cross-selling can be extremely effective methods for increasing customer lifetime value. By using customer data to identify customer needs and interests, you can make your customers feel special by offering them products that are exactly what they need.
Learn more by reading What's the difference between upselling and cross-selling?
Customer lifetime value is an important customer metric that can help you determine customer purchase behavior over time. By understanding customer lifetime value, your business will be better equipped to answer critical business questions and make sound decisions with regards to where to allocate resources in order to maximize profit.
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