What is Customer Lifetime Value (LTV)?

“The lifetime value of a customer, or customer lifetime value (CLV), represents the total amount of money a customer is expected to spend in your business, or on your products, during their lifetime. This is an important figure to know because it helps you make decisions about how much money to invest in acquiring new customers and retaining existing ones.” (Shopify)

The longer a customer continues to purchase from a company, the higher their lifetime value grows.

For instance, if a customer orders products or buys services from your business for 10 years and spends $100 per year, his or her customer lifetime value is $1000, minus any money you paid to obtain that customer.

Imagine that you sell sweaters from an e-commerce store.

Let’s say you spend $5 in advertising to attract a client. She orders an average of two sweaters every year, for 10 years. Your profit margin on each sweater is $50.

Let’s say you spend $5 in advertising to attract a client. She orders an average of two sweaters every year, for 10 years. Your profit margin on each sweater is $50.

Based on this data, you profit $100 per year from the customer, which works out to $1,000 over the decade. You then deduct the amount of money you spent to get the customer, which results in a net customer lifetime value of $995.

How Do You Calculate Customer Lifetime Value?

You might want to measure CLV based on real purchases over the years or based on what you predict customers will spend.

The most straightforward customer lifetime value formula is the historic model. In this case, the CLV is equal to the total value of all transactions multiplied by your average gross margin.

Let’s say a customer spent $100 and your average gross margin is $10, which means you’ll multiply $100 (the total amount spent) by $10 (your average gross margin) to get $1000.

If you want to take advantage of the predictive approach instead, it’ll get a little more complicated.

This average customer lifetime value formula requires:

  • The average gross margin
  • The average monthly transactions
  • The average amount spent per transaction
  • The average number of months your customers will remain loyal

Multiply these numbers together will give you the predictive CLV.

How to Maximize e-Commerce Customer Lifetime Value

Outline Your Customer Lifecycle

Not every e-commerce has the same customer lifecycle. Depending on your business and the products you sell, their lifecycle may be remarkably simple or extremely complex. It could take only a couple of months to engage a loyal customer, or it could take years. Despite that, most shoppers go through 4 basic steps:

  • No Purchase
  • Single Purchase
  • Repeated Purchases
  • Loyal Customer

Of course, not every customer will become a loyal customer; some of them will drop off and won’t return to order again. But your goal as an e-commerce owner is to push them through the sales funnel and drive them towards that final stage.

Once you’ve identified and broken down your customer lifecycle into specific sections, you can outline your marketing strategy activities to each stage. You should personalize and segment your content with customers according to where the buyer is in the lifecycle.

For example, a group of single purchase customers might need a push to come back to your e-commerce and make a second purchase. By identifying that group, you can deliver targeted ads on social media like a 25% discount off their next purchase.

Replenishment Campaigns

Insert replenishment campaigns into your marketing strategy to increase your customer lifetime value. They will drive more predictable revenue and profit from your repeat customers.

This kind of campaigns also generates higher conversion rates, which is even higher if you coordinate campaigns across multiple channels for maximum visibility, like social media, paid ads, email marketing, etc. This technique might help you drive repeat purchases from your customers and put them in the path to becoming loyal shoppers.

Cross-Selling & Up-Selling Campaigns

Both cross-selling and upselling involve approaching existing customers and convincing them to purchase additional products or services.
“In the case of upselling, your goal is to sell a more expensive, more advanced product to the customer than they had planned by conveying its added benefits. Cross-selling involves selling related, supplementary products or services based on the customer’s interest in, or purchase of, one of your company’s products.” (Saleforce)
If you’re able to point your new customers to related products that acknowledge their needs, they will more likely make additional purchases and increase CLTV.

You can deliver personalized recommendations by keeping the entire customer lifecycle in mind, analyzing browse behaviour and historical purchases to source valuable insights.

Loyalty Campaigns

A customer loyalty program is a marketing strategy that rewards loyal customers that frequently engage with a brand.
Giving rewards in exchange for purchases is a practical approach to encourage higher-value customers to buy more.

Conclusions

Customer lifetime value involves more than you think. It influences customer retention rates, unveils the level of brand loyalty, and helps your business increase sales.

If you’re not actively working to increase CLV, now’s the time to start!