Learn how to work out and increase Customer Lifetime Value (CLV) for your online store, with examples and case studies.
If you’ve ever asked ‘how much is a customer worth to my business?’ or ‘how much can I afford to spend to acquire a customer?’ then this is the article you’ve been waiting for.
Keep reading to discover how to calculate Customer Lifetime Value (CLV) and why it’s a crucial metric for ecommerce brands.
We’ll also show you how to increase the CLV of your online store, with examples and case studies to boot!
What is Customer Lifetime Value (CLV)?
Why is Customer Lifetime Value an important metric?
How is Customer Lifetime Value calculated?
How to increase Customer Lifetime Value
Customer Lifetime Value (CLV, sometimes called CLTV or LTV) is defined as the total amount of money a customer is predicted to spend with a business over the entire duration of their relationship.
CLV is a more comprehensive way of measuring the customer relationship than a method like Average Order value.
It’s an essential metric that all ecommerce brands need to know to make effective business decisions.
CLV helps you understand the value of a customer - vital information that helps you work out how much you can spend to acquire a new customer and retain healthy profit margins.
If a customer is worth more to you in total revenue than it costs to acquire them (including all logistics, delivery and labor costs etc.), then you’re making money and you’ve reached profitability.
However, if your Customer Acquisition Cost (CAC) is higher than your Customer Lifetime Value, you’re not going to be in business long.
The top 1% of ecommerce customers are worth almost 18 times more than average customers.
When you’re able to break down your customer base by high CLV and low CLV, you’ll be able to spend more to acquire the valuable customers, safe in the knowledge that they’ll be extremely profitable in the long-term.
You’ll also be able to reduce the resources you spend on acquiring low-CLV customers, making your marketing more effective.
The Customer Lifetime Value Formula (CLV) is:
Customer Lifetime Value = Customer Value x Average Customer Lifespan
We’re going to explain these concepts and where to find the information you’ll need to calculate CLV below, as well as showing you how to increase your Customer Lifetime Value.
To work out CLV manually, you need to carry out four steps:
(TL;DR - use Segments free 14-day trial and we’ll calculate Customer Lifetime Value for you automatically!)
We’re going to explain these concepts and where to find the information you’ll need to calculate CLV below, as well as showing you how to increase your Customer Lifetime Value.
The RFM model stands for Recency, Frequency and Monetary Value. It’s a segmentation method used by marketers and online store owners to understand which customers are most valuable to a business.
To learn how to calculate RFM, follow the instructions in this article.
Done that? Fantastic!
Once you’ve segmented your customers using RFM analysis, we need to work out ‘Customer Value’.
Customer Value is the average monetary value of each customer and you work it out by multiplying Average Order Value by Purchase Frequency.
Customer Value = Average Order Value x Purchase Frequency
And here’s a quick reminder of what those are and how to work them out:
Make sure to use the same time period when doing this calculation. We suggest choosing 12 months.
The next step is to find Average Customer Lifespan - the normal length of time a relationship with a customer usually lasts before they stop buying from you permanently.
Segments customers can use the ‘Churn’ segment to see an accurate estimation, but Shopify recommends choosing a lifespan of three years if you don’t have this data.
Alternatively, follow Josh Wilson’s instructions in this article.
Now we have all the pieces we need to calculate Customer Lifetime Value. Multiply Customer Value by Average Customer Lifespan to get your CLV figure.
Remember that if you don’t know your Average Customer Lifespan, you can use a lifespan of three years, but keep in mind this will be less accurate.
Customer Lifetime Value = Customer Value x Average Customer Lifespan.
So, now you have your Customer Lifetime Value, but why is it important and how do you increase it?
In short, brands can maximize CLV by increasing the amount of money each customer spends and increasing the number of times each customer orders.
Let’s talk about how brands can:
We went in-depth on how to increase AOV in our ecommerce guide to Average Order Value - check it out for explanations of each method, as well as examples, case studies and the best Shopify apps to help you execute each one.
Here’s a summary:
How Cellular Outfitter raised Average Order Value by 10%
Edwin Choi, VP of marketing at Cellular Outfitter’s parent company, Mobovida used the concept of ‘impulse buys’ to increase AOV by 10%. After their first test failed, they realised that different cohorts of customers were using their site in different ways.
They employed tiered discounts that only kicked in at certain cart sizes for coupon redeemers but not any other customer type, a change which resulted in a 10% increase in sitewide AOV.
Of the experiment, Edwin said:
‘This single test has added millions of dollars in revenue to our site per year...For us, this test also highlights the importance of testing for learnings instead of wins. When we lost heavily during the first test, our first reaction was not “Aw shucks, we lost. Let’s go for that win!”, it was “Let’s see what we can learn from this” – and the second home run test would not have happened without the first test.’
There are two main ways to increase the number of times someone buys from you - increase the frequency of purchases they make, and increase the length of time they stay with you.
Our ecommerce guide’s to Customer Retention and Customer Churn Rate are resources with strategies to increase customer loyalty as well as stats, examples and case studies, but here’s an overview:
The number one reason most customers stop buying from a company is lack of customer contact.
Email is one of the most effective tools at your disposal when it comes to talking to your customers. That’s why we’ve handpicked 11 email strategies to increase your customer retention rate. Click on each one to see what they are and how to use them:
Research suggests that 90% of customers who experience great customer service will buy again from the same company.
Here’s how you improve your customer service:
Keep your customers coming back for more with rewards like discounts, free gifts and exclusive access. Loyalty programs can increase your revenue per customer and increase your customer referrals.
Here’s what you need to know about loyalty programs:
40% of the average online store’s annual revenue comes from repeat customers. So how do you get your customers to buy from you more often?
Email providers like Klaviyo allow you to send retargeting emails to previous customers whenever they view a product, regardless of whether they’ve added it to their cart. If you sell consumables, like food, nutrition or beauty products, you can use email marketing to send a reminder to buy again just before the product is expected to run out.
Remarketing through ads isn’t only for new customers. Target existing customers with suitable cross-sells that complement their most-recent purchase. For example, set up a Facebook or other social media campaign to target anyone who has recently bought a scarf with a hat and ad text like ‘the perfect partner for that scarf this Winter.’
Personalization can work with multiple touchpoints, like social media ads, emails and even your website. Improve your website with a bespoke product carousel that changes based on customers’ preferences and browsing history. Shopify offers Personalization apps like [Limespot] this one and you can read more about ecommerce personalization here. Luxury tea-brand, Tea Forte, used personalization to show bespoke messaging and products to particular customer segments using email. Jurgen Nebelung, VP of Ecommerce and Digital credits a mindset shift from campaign-centric to customer-centric for the 25% increase in CLV they saw.
Deals can be used to incentivize existing customers as well as new ones. Because you’ll likely have more customer data on previous customers, you can go the extra mile and send them special offers on their birthday, or a year after they made their first purchase as a thank-you for shopping with your business.
Surveys should be used to identify ways to improve your customer experience. Using their responses will help you to improve your online store and research has shown that the act of surveying customers can actually increase sales by generating awareness of a business and its products. Surveys are also key to understanding and improving your Customer Satisfaction Score.
The popular vaping store used website notifications to show relevant reminders to customers who were part of their loyalty program. The notifications increased the amount of customers engaging with the program and led to more purchases in a shorter time frame. Here’s what Founder Trevor Taylor had to say:
‘There were a handful of customers that religiously used their points as they accrued them (mostly at the $10-20 reward mark), but this year we also turned on the email feature to remind customers that they had points to spend 14 days after earning enough to redeem...since setting it up, we’ve had a marked uptick in returning customers using redeemed rewards and having those orders come through at a more regular and even pace (vs a tendency to have “hot” days where stacks of orders come in, generally on Fridays/paydays).’
So, to remind ourselves, the Customer Lifetime Value calculation looks like this:
Customer Lifetime Value = Customer Value x Average Customer Lifespan.
(But If you want a short-cut, try out Segments’ 14 day free trial and we’ll do it for you!)
Once you’ve found your CLV, you can increase it by targeting Average Order Value, Customer Retention and Purchase Frequency. By working on all three, you’ll likely see massive returns!
Thanks for reading!
We hope you enjoyed reading this post and have some long term takeaways to start actioning internally. As always check out the Segments app for easy to use actionable insights to grow your store revenue and don’t forget to follow us on LinkedIn for more #ecommerce tips and tricks!
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