What creates loyal customers that come back time and time again? How long does your average customer stick around?
Customers come and go, and it's critical to know how much time and money you have invested into each one.
Customer lifetime value (CLV) is one of the most important metrics your eCommerce business should be tracking in order to grow predictably. Here's some important information that you need to know about CLV and how you can calculate each customer's cost for your business.
What Is Customer Lifetime Value (CLV)?
CLV determines the value of each customer, telling you how much you can spend to acquire and retain each customer and in the end, helps you improve customer value.
This metric becomes more insightful when you begin segmenting your existing customer base. If you conducted a Google search on how to calculate CLV, you would find that there are many methods listed.
Although more advanced methods customer lifetime value formulas exist, we will provide a simple way for you to get the information you need to refine your approach to customer acquisition. For this simple method, we will need to calculate the following variables:
- Average Order Size (AOS)
- Average Order Frequency (AOF)
- Customer Value (CV)
- Average Customer Lifespan (ACL)
If your current eCommerce platform does not make this information readily available, you can export this data into a spreadsheet to perform the calculations. Columns required will be:
- Customer Name
- Total Revenue
- Number of orders by customers
- Number of days between first order date and last order date
If you need to calculate this manually, download your customer data with the columns highlighted above and follow the 5 steps outlined below.
Why Should I Calculate Customer Lifetime Value?
It Helps You Budget
If you can effectively calculate the average value of a customer, you can better understand your budget and how many new or existing customers you need to keep your business afloat.
You Can Better Understand How to Retain Customers
If you know how long the average customer stays with you, you can more easily break down how or why they left. You can really look at what you're doing right and--more importantly--how you can improve to retain loyal customers that order from you time and time again. Retaining steadfast customers is the key to increasing the average value of a customer.
To Increase Profit Margin
And of course, the higher the value of your average customer, the more profits you make. Who doesn't want that?
What Are The Steps to Calculating Customer Lifetime Value?
Step 1: Calculate Average Order Size (AOS)
The average order size (AOS) is the average amount of money that a customer spends each time they place an order. Your average order size is calculated by calculating your total customer revenue for a given period and dividing the total orders performed by these customers to calculate your average order size.
Step 2: Calculate Average Order Frequency (AOF)
The average order frequency (AOF) represents the average amount of orders placed by each customer. Your average order frequency (AOF) is calculated by compiling the total number of orders for a given period and dividing it by the total number of customers for a given period.
Step 3: Calculate Average Customer Value (ACV)
The average customer value (ACV) is the average revenue value that each customer brings to your business during a given timeframe. The average customer value can be determined by multiplying the average order size (AOS) with the average order frequency (AOF).
Step 4: Calculate Average Customer Lifespan (ACL)
The average customer lifespan is the average number of days between first order date and last order date of all of your customers. Convert the average number of days into years by dividing your number by 365. For example, if you determine that the ACL is 1,277.5 days, this would equate to an ACL of 3.5 years.
Step 5: Calculating the Customer Lifetime Value (CLV)
To calculate your average customer lifetime value (CLV) using this simple method, multiply your average customer lifespan (ACL) to your average customer value (ACV).
Bringing everything together, using the data below as an example, we can determine that the average customer lifetime value in this example is $187.50.
Ultimately, to determine the CLV margin contribution for each customer, we can multiply the gross margin percentage to CLV to calculate the CLV grow margin contribution. In this example, with a gross margin percentage of 50%, our CLV grow margin contribution would be $93.75 to determine how much money we should budget to acquire and retain customers. Not all customers are valued equally. Depending on the type of business you are in, you can further segment your customer base in order to gain insights on the value of each segment:
- Most Purchases
- Product and service line
- Order frequency
- Order value
What Are Some Tactics to Increase Customer Lifetime Value?
Based on the variables used to calculate customer lifetime value, it is evident that by increasing the average order size (AOS), average order frequency (AOF), the length of the average customer lifetime (ACL) or all three, we can increase customer lifetime value (CLV). In addition to these variables, average conversion rates can influence the customer lifetime value. Below are some tactics to increase customer lifetime value:
Increase The Average Order Frequency
- Nurturing the right customers, with personalized content and offers, at the right time with email marketing campaigns
- Staying in front of customers with retargeting ad campaigns
- Create a loyalty program that rewards order frequency
- Customer Service and Return Programs
- Using data-based personalized marketing that highlights products or services based on past activity, interest, or purchases
Increase The Average Order Size
- Offer free shipping with a minimum order size
- Present bundled offers
- Present upsell and cross-sell offers
- Create a loyalty program that rewards spending levels
Increase The Average Customer Lifetime
- Build a rapport with your customers via email marketing and social media
- Host events for local customers, participating in the physical community presence
- Nurture customer relations by focusing on customer service strategies and improvements
- Establish a customer-centric approach to inbound marketing and social media that focuses on the customer’s needs and interests over the constant push to sell
Increase Your Conversion Rate
- Provide social proof with online reviews
- Personalize content and offers to the right customer at the right time
- Provide free shipping
- Offer discounts
- Streamline the checkout process by removing unnecessary steps and using smart forms
- Send cart abandonment reminder emails
- Provide exit offer at checkout
Acquiring new customers is important to every business, and mining customer lifetime value unlocks huge potential for growth.
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