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.
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:
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:
If you need to calculate this manually, download your customer data with the columns highlighted above and follow the 5 steps outlined below.
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.
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.
And of course, the higher the value of your average customer, the more profits you make. Who doesn't want that?
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.
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.
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).
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.
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:
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:
Acquiring new customers is important to every business, and mining customer lifetime value unlocks huge potential for growth.
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