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Customer Lifetime Value (CLV or often CLTV) is an ecommerce metric that predicts the net profit a customer is expected to generate for your business throughout their lifetime.
The following illustration shows the customer lifetime value (CLTV) formula:
Let's see how to calculate customer lifetime value (CLTV) with an example,
Note: If this customer stays with you longer, the CLTV also increases, which means more revenue for your business.
By taking CLTV into account, businesses can understand the value of each customer and plan revenue-oriented decisions.
There are many reasons for businesses to calculate CLTV, such as:
Acquiring new customers is five times more expensive than retaining existing customers. However, new and existing customers are equally important for a business, but resources are finite. By allocating resources on loyal customers, you can save a tremendous amount of time as well as money. Moreover, loyal customers get their friends to buy from your brand through referrals.
You can significantly reduce marketing expenditure by focusing on high-value customer groups instead of undervalued customer groups. These high-value customer group will boost your revenue with repeated purchases as they already are your loyal customers and increase the overall ROI.
There are various strategies to improve your CLTV, but it is essentially done in one of the two ways:
You can use merchandising techniques like product kitting —pre-built kits and custom combos, where customers purchase a set of multiple products instead of one product. Additionally, you can also provide minimum order incentives like free shipping, coupons, samples, or even direct discounts to your customers. Such techniques will increase the average order value (AOV) and ultimately improve your CLTV.
Collect customer data and provide relevant product recommendations to your customers. This sales technique invites the customer to purchase more expensive products, upgrades, or other add-ons to generate more revenue. It exposes other products to customers which they haven't considered.
Customer retention is the key to improve CLTV. The longer the customers stay with your brand, the more revenue you will generate. To retain your most loyal customers, you can create customer loyalty programmes.
Happy and satisfied customers spend more money on your merchandise and also recommend brands they love to their friends and family. For example, you can increase customer satisfaction by resolving customer queries quickly and professionally, ensuring fast shipping, enabling order tracking, offering easy returns and more. You can also foster relationships with customers by taking their valuable feedback and suggestions.
Customer Lifetime value is the go-to metric for ecommerce businesses to achieve long-term success. By calculating CLTV and applying it, you can retain customers who will become advocates for your business, as well as repeat buyers. As you focus on the needs of the right customers and build the right products, you can streamline your business processes, reduce marketing expenditure and increase your overall ROI.