A customer's lifetime value works backwards.
What matters is not how much money you can get from your customers. But it's how much value you provide during their lifetime.
So, instead of viewing CLV as a revenue metric, look at it as a value metric.
To help you get started, let's look at:
- What is Customer Lifetime Value? (I know it is available everywhere. But we'd still need a ground to takeoff!) ✈️
- Why it's important to measure CLV?
- How do you measure CLV for your business?
- How can you increase your CLV to keep your customers coming back for more?
Because there is so much to cover, let's dive straight in…
Customer Lifetime Value Explained!
Like a fortune-teller uses a crystal ball ? to see the future.
You can use CLV to predict your business's future growth and success.
CLV refers to the total revenue a business can expect from a single customer account.
High CLV is an indicator of brand loyalty. It also means you don't have to spend a lot on acquiring new customers.
Because you can achieve your revenue goals from your existing customers. The longer a buyer continues to buy from a brand, the greater their CLV becomes.
Although CLV is so powerful, only a few companies are using it to their advantage.
What could be the reason for this? Let’s find out...
Why Don’t More Companies Use Customer Lifetime Value?
That’s because of two reasons.
First, customers now make purchases using different devices. Some of them use their desktops, while others prefer smartphones or tablets.
Because of this, collecting and organizing data from different platforms can cost you a lot.
Second, many businesses do not have qualified personnel to track and calculate CLV.
As a result, most companies either compromise on data accuracy. Or avoid calculating CLV altogether. And they miss out on retention and conversions.
You don’t want that to happen to you, right?
So, make sure you have the right data collection methods. And you need to learn the basics of calculating CLV for your business.
Not sure where to start?
Lemme tell you first why you need to calculate CLV for your e-commerce business.
Why Do You Need To Measure Customer Lifetime Value?
What sets CLV apart is it can look forward. Unlike customer profitability that measures past activities, CLV is more future-focused.
Why is it important, and eCommerce owners should learn to calculate it?
The answer is simple. It helps you know your customers better.
Not only this, but it also helps you focus on the efforts of acquiring the right customers.
How else can measuring and increasing CLV help your business?
Let's check it out...
1. It Maximizes Profit
The biggest advantage of CLV is it affects your profitability.
Let me elaborate...
You don't have to spend more on customer acquisition when your goal is to benefit from your existing customers.
Your marketing expenses reduce, and you get to keep more margin on sales you're already having.
Another benefit is that it...
2. Helps You Identify Your Most Profitable Customers
By calculating CLV, you can identify your most profitable customers. That means you no longer have to exhaust your resources on buyers who add little to no value to your funnel.
Instead, you can shift your focus to those who are actually valuable to your brand.
CLV also helps you foster long-lasting relationships with your customers.
Let me show you how...
3. Strengthens Your Relationship With Your Customers
Moreover, measuring CLV will lead you to understand industry trends better.
4. Repeat Orders = Steady Cash Flow
Getting repeat orders from existing customers brings in a steady cash flow. You don't have to think a lot about marketing costs when you know cash is coming in.
Aside from that, it also...
5. Increases Reinvest Opportunities
With so much cash rolling in, you can reinvest some in your growing business.
Also, when you're able to cut marketing costs, you can consider expanding overseas.
Not only this, but you can also develop new products or hire personnel to help you with your technical tasks.
All of this...
6. Helps You Scale Your Business
Another benefit of using CLV is that it helps you gain leverage by optimizing your campaigns.
With CLV strategies, you can put in place better customer retention strategies. You can also take it as an opportunity to improve your products and add value to your customers.
Knowing how to use CLV will lead you to understand industry trends better.
7. Leads You To Get More Useful Insights
You cannot calculate CLV without collecting data. You need RFM for that:
Recency, Frequency, and Monetary Value.
Recency: When was the last time a customer made a purchase?
Frequency: How many times has a customer purchased in a given period?
Monetary Value: How much money a buyer has spent in a specific period?
With the help of this data, you can divide your customers into segments based on how much they interact with your business.
See how this data has been put to use by a Shopify business owner. He graded recency, frequency, and monetary value on a scale of 1-3.
1 being the least valuable. 2 being the moderate one, and 3 being the highest.
He added up all the fields to get an RFM score. Red shows the most valuable group of customers. And yellow highlights the one-time customer segment.
This data gives insight to the seller to the number of customers. And how much and how frequently they shop from him.
With this helpful information, he can develop better strategies to target each segment of his buyers.
So, you never know...
Continue reading if you want to learn some foolproof ways to calculate CLV.
How Can You Calculate CLV For Your Business?
Ready to calculate CLV?
Roll up your sleeves for some serious research and calculation.
I am kidding; it’s super simple!
1. Customer Lifetime Value
To calculate your customer value, you need to multiply your AOV by Purchase Frequency.
Customer Value = Average Order Value X Purchase Frequency
The first thing that we need to calculate CLV is the average value order.
2. Average Order Value
AOV is the average sum that the customers spend every time they place orders at the website. To calculate AOV, you need to divide your total revenue by the total number of orders.
AOV= Total Sales / Order Count
You don't need to calculate this because you can get this report right in your Shopify dashboard. Here's how:
Head to the Report Section of Shopify’s Admin to find the information you need to calculate AOV.
Take a look at your sales by month. Next, divide your total sales by the total number of orders for the past year.
Pro Tip: To get a more precise number, click Define under Total Sales. Uncheck everything except for Subtotal.
3. Purchase Frequency
Purchase frequency represents the average number of orders placed by each of your customers. Make sure to use the same timeframe as your AOV calculations.
To calculate purchase frequency, divide your total number of orders by the total number of your customers. Make sure not to include repeat customers.
Purchase Frequency = Total Orders / Total Customers
Shopify store owners can find the data to calculate purchase frequency in Reports under Sales by Customer.
Once you have AOV and purchase frequency, multiply them to get your Customer Lifetime Value.
4. Customer Lifetime Value
To calculate your customer lifetime value, simply multiply your AOV by Purchase Frequency.
Customer Lifetime Value = Purchase Frequency X Average Order Value
Now we have a very interesting question:
What is a good customer lifetime value?
Well, no one can give you the exact answer for this. CLV depends on many factors, such as CAC (Customer Acquisition Cost), your industry, and more.
As a general rule, you're good to go if a customer spends 3-times more than their CAC.
Customer Acquisition Cost or CAC is the cost of acquiring a customer to make him buy the product.
So, if the ratio between your CAC and CLV is 1:3. You are doing great!
If not, then there are many ways to improve it.
I’ve mentioned 5 tips below which will help you boost your CLV (almost up to 3x) and retain more of your valuable customers.
How You Can Improve CLV For Your Business?
1. Make Your Onboarding Worth-Remembering
The first thing that you need to do for improving your CLV is to create a great first impression of your business.
When a customer learns about you and approaches your website, give him a phenomenal experience. So, for the starters, you can share valuable tips and content with him. Show him the content that is relevant and helpful to him.
See how Printful welcomes its new customers onboard. It shares different tips and resources to streamline its buyer's journey.
You can also provide tutorials, video guides, walk-through tips, and other resources to help customers trust your brand.
Another thing that you can do is...
2. Make It Easy For Customers To Buy
Make sure you nail your buying experience.
Your customers won’t buy from you if they find it difficult to do so.
Let’s take the example of AliExpress checkout page here.
It's simple, to-the-point and above all, it lets customers change their orders at the last minute.
So the thing is...if your checkout process is too complex, customers will not bother to visit your site again.
You can also...
3. Offer A Loyalty Program
Launch a loyalty program if you want your CLV to shoot through the roof.
With loyalty programs, you can offer your customers the rewards they want.
They will value your consideration and keep coming back for more.
Starbucks asks its customers to collect stars. They can use them to buy a cup of their favorite brew in any of their preferred outlets.
The idea is to keep your customers engaged in your offers so they don't look anywhere else. It also tempts them to spend more on your products.
Let’s talk more about it below.
4. Encourage Them To Spend More On Your Products
You can also increase your CLV by encouraging your customers to spend more on your products.
How can you go about it?
Play with the pricing psychology: Some customers read from left to right. For them, $399 will always be less than $400.
Add reviews: Some people will only risk their money if they find others doing the same. So throw in some reviews to build their trust.
Trigger FOMO effect: Some people only react when they see one 1 item left in your inventory. You can motivate them to purchase that last item before it goes out of stock.
That's how Amazon keeps its customers on their toes...
Another tactic that you can apply to improve your CLV is:
5. Increase Your Average Order Value
One of the smartest moves to increase your CLV is to improve your AOV.
CLV and AOV are directly proportional. Increase in the value of one leads to the improvement of another.
The best way to increase your average order value is by offering bundles and deals.
Bundles and deals make the customer think that he’ll get more items for a slightly higher price instead of paying for just one product.
For example, the price of a pizza is $20. While a deal offers the customers one pizza, garlic bread, and salad for $25. The customer won’t mind paying extra $5 for getting more items.
Deals and bundles are also beneficial for the business. It can clear its stock and tempt customers to buy more.
In short...bundle deals are a win-win for both business owners and customers. McDonald's bundle deals can be the best example.
If they can do it, you can do it too...
Optimize And Fine-Tune Your CLV...
Customer Lifetime Value is an important metric. It gives you insight into your:
- Total number of customers
- Total number of orders
- Amount of sale; and most importantly...
It helps you identify the customers that spend the most at your business.
So, use the formula shared above to calculate CLV for your business today. And don’t forget to try out the tips for improving your CLV.
Did you know Debutify can be your best ally to improve CLV?
Debutify can help you improve your CLV and boost retention with its 5 Loyalty Builder Add-Ons.
Let me show you a glimpse of what these add-ons can do for your store:
1. Back in Stock: Allow customers to fill up a back-in-stock request. So, you can notify your customers about the restocking of products via email.
2. Instagram Feed: Show off your followers and display the latest images of your Instagram Feed.
Display your aesthetic Instagram feed on your Shopify store.
Online visibility and the presence of a brand community are vital for eCommerce businesses. By displaying your Instagram feed, you can generate social proof by showing:
- Your number of followers
- User-generated content
- Collaboration and endorsements with renowned people
3. Newsletter Pop-Up: Stay in touch with your customers through emails. This add-on enables you to capture the email address of your site visitors.
4. Order Feedback: Let your customers know that their feedback matters to you. And to find out how your customers know about you. Add Debutify Reviews to your store and generate this feedback and reviews from your beloved customers.
5. Wish List: Allow customers to add their favorite products to a wish list, so they can buy them later.
So, what are you waiting for?
Download Now - No Credit Card Required - 14-Days Free Trial.