E-commerce Tips & Tricks 5 min read
09 Jul 2021

Top Seven Simple Ways To Calculate Customer Lifetime Value

Top Seven Simple Ways To Calculate Customer Lifetime Value

From creating awareness to triggering consideration and driving conversions, you have to achieve different milestones before earning a customer for life. 

But why is it critical for your business to have happy customers on board? Isn't it easier to have new customers every time you launch a campaign? 

The answer to this question is 'No.' Why? Because customer acquisition costs businesses 7 times more than customer retention

Also, you can't expect that level of loyalty and trustworthiness from the new leads that your old and faithful customers show and validate at every step. 

While it is a good idea to grow your customer base, you must also understand the significance of Customer Lifecycle Value for your business.

Fret not if you haven't heard of this term earlier, as we're going to walk you through everything you need to know about improving Customer Lifetime Value. 

We're also going to highlight some technical aspects associated with Customer Lifecycle Value, including average Customer Lifetime Value, ways to calculate Customer Lifetime Value, and how you can increase the Customer Lifetime Value for your business using simple tips and tricks. 

What Is Customer Lifetime Value?

By definition, Customer Lifetime Value (CLV) is a metric that determines the average sum of money a customer can be expected to invest in your products and services from start to end. 

Business owners and digital marketers use this metric to define their sales and marketing goals. By measuring CLV at regular intervals, you can reduce your customer acquisition rates, build loyalty, and persuade your existing customers to spend more with your brand. 

The Role Of Customer Lifecycle Value In Startup Growth And Success

If you're new to the world of ecommerce, you must have questions regarding why you should invest your resources to market to people you have already sold to.

The thing is, not all customers are created equal. For most businesses, a small segment of customers brings repeat sales and more value to the table. Calculating your Customer Lifetime Value will enable you to allocate more resources to acquiring and retaining high-value clients. 

So what other benefits can you expect when you calculate CLV for your business? Let's find out. 

Saves Times And Money

The biggest perk of calculating CLV for your business is that it allows you to identify those high-value customers who contribute more to your conversion funnel. By identifying those buyers, you can save both your time and money on wasting people who're adding zero value to your revenue generation process.

Customer-Centric Marketing

Customer Lifecycle Value leads to marketing that focuses on the biggest asset of your brand - Customers. In other words, by assessing CLV, you can focus more on marketing approaches that highlight product benefits instead of its features. 

Improves Brand Loyalty

By calculating Customer Lifetime Value and optimizing it, you can significantly improve customer retention for your brand

As an online seller or a marketer, you must provide those loyal customers with something of equal or greater value as a reward for their loyalty and constant patronage. That could be anything - a coupon code, an e-book, or a voucher they can redeem on their next purchase. 

Improves Conversions

When you're able to foster and nurture loyalty through excellent customer services, loyalty programs, and deals and discounts, it tends to increase your conversion rate. 

Customer satisfaction impacts your bounce and churn rate, making it possible for you to have buyers who are genuinely interested in your products and services and contribute to your sales funnel. 

Before we highlight the top seven ways to calculate Customer Lifetime Value, it is essential to know the average Customer Lifetime Value you must target for your ecommerce business. 

Average Customer Lifetime Value

Ideally, your Customer Lifecycle Value should be 3 times more than your Customer Acquisition Cost. For example, if you're investing $200 to have a new customer on board, that buyer should have a Lifetime Value of at least 600 or more. 

But because every business is different, the one-size-fits-all approach is not applicable here. 

Analyze how your competitors are calculating CLV for their businesses, and then you can set benchmarks for your brand accordingly. 

Top Seven Simple Ways To Calculate Customer Lifetime Value

Now that you know what Customer Lifecycle is and why you need to calculate this metric to improve customer retention and loyalty, it is time to do some basic math. 

Customer Lifetime Value Models

Historical Customer Lifetime Value Model

The historical model, as its name suggests, uses past data to determine the CLV of a customer. This model leverages an average order value to predict your customer value.

This approach is ideal for you if most of your buyers interact with your brand over a specific period. 

But similar to anything else in the world, this model also has some limitations. For instance, customers who were active in the past can become inactive and unengaged over time. 

On the other hand, customers who were inactive in the past may start buying from your brand again. So, it may result in data fluctuations and inaccurate results. 

Predictive Customer Lifetime Value Model

Unlike the historical model, the predictive customer lifetime value model focuses on the buying behavior and preferences of your current customers. 

With this model, you can identify your most valuable customers and create strategies to retain them.

No matter what formula or approach you use to calculate Customer Lifetime Value, these metrics will help you get started. 

1. Average Purchase Value

Average Purchase Value is a metric that measures the average value of each order placed by your customers. This KPI mainly depends on the types of products/services your brand offers to its customers. 

To calculate the Average Purchase Value, all you need to do is divide your total revenue generated in a specific period by the total number of orders received in the same period. 

APV = Total revenue/Total orders

2. Churn Rate

The Churn Rate indicates the percentage of customers who stopped doing business with your brand in a stated period. You need to measure this metric as only then you'd be able to create strategies to reduce this rate and have more repeat business. 

To calculate customer churn, you have to divide the total number of customers left by the total number of customers you had at the beginning of the period. 

Customer Churn Rate = Total number of customers left/Total number of customers you had at the start of the period

3. Average Purchase Frequency Rate

Next on our list is the Average Purchase Frequency Rate. This metric reflects the average number of times a buyer does business with your brand. 

You can use this formula to calculate this metric.

Average Purchase Frequency Rate = Total number of purchases made over a stated time period/Total number of unique buyers who made purchases during the same period

4. Retention Rate

Retention Rate is the percentage of customers your business retains over a given period. 

This metric is critical as it allows you to figure out how much you need to spend to keep your buyers coming back.

To calculate the Retention Rate, all you need to do is divide retention marketing costs by the number of customers. 

Retention rate = Retention marketing costs/Number of customers you have

5. Average Customer Lifespan

The Average Customer Lifespan means the average number of days between the first and last order date of all your buyers. 

To calculate this metric, you first have to convert the number of days into years. For this, you have to divide the average number of days by 365. 

6. Customer Value

Customer Value enables the brand to evaluate the worth of their business to a customer versus all other options available in the market. 

Here, the worth refers to the level of satisfaction the customer achieves after paying a certain sum of money in exchange for your products or services. 

In order to calculate Customer Value, you have to subtract benefits from the cost.

Customer Value = Benefits - Cost

7. Cost Of Customer Acquisition

As far as the Cost of Customer Acquisition metric is concerned, the name says it all. It means the total money that your business has spent on acquiring new customers.

To calculate this metric, all you need to do is divide all the marketing costs spent on taking the new customers on board in a stated time period by the total number of customers acquired in the same period. 

Cost of Customer Acquisition = Total marketing cost spent on acquiring new customers/Total number of customers acquired

How To Improve Customer Lifetime Value?

Put Your Loyal Fans In The Spotlight

Who doesn't like fame? Of course, we all do!

If you have fans who share your content regularly within their social circles or motivate your brand on different online forums, you can put them in the limelight and let them know how much you admire their efforts. 

For instance, you can embed your customer's social media posts into your blog posts or other content pieces. This strategy can go a long way when done right. 

Send Your Loyal Customers Something They Truly Care About

Another proven way to increase the Customer Lifecycle Value is sending something to your customers they truly love. You can take a hint from their social profiles and social media activities to see what they're into. 

For instance, you can send them a free downloadable link to an e-book written on their favorite subject or also send a physical product via courier if you're aware of their likes and dislikes. 

Be Always There When They Need You

While it is a good idea to offer your loyal customers something for free, it doesn't always have to be a monetary reward. Present-day customers are clever, and they only prefer to shop from brands willing to go the extra mile to know their needs. 

Offering them personalized and timely support is one of the ways you can earn their trust and have them with your brand forever.

You don't really have to wait for them to reach out to your support team. Make sure you stay in touch with your fans and ask if they need help with their orders. 

Be A Problem Solver

Your goal as an online seller isn't confined to extracting more money from your customers. Remember, your customers see your brand as a problem-solver - a platform where they can have a solution for their issues.

So, you must spend your time and money on understanding your customer's pain points, as only then you would be able to come up with the right solutions. 

Ask For Their Feedback 

Asking your customers for their feedback is another way to make them feel valued. You can even ask them for an opinion if you're about to launch a new campaign or a new product.

This way, your loyal customers will feel as if they're part of your brand. 

Focus On 'Quality' Rather Than 'Quantity'

Last but not least, always focus on quality instead of quantity. While it may be tempting to have many customers on board, it is more important to focus on buyers who add value to your conversion funnel. 

Also, always attract your customers with impeccable quality. 

Take the example of Apple here. The brand has successfully managed to create a group of Apple lovers who never think about giving any other brand a try. What makes them support Apple? It's the quality of their products that sets them apart. So, make sure you offer your customers the quality they won't find anywhere else. 

Ricky Hayes

Ricky Hayes

Ricky Hayes is the CEO at Debutify. He is a passionate entrepreneur running multiple businesses, marketing agencies, and mentoring programs.

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