Customer Lifetime Value: How to calculate and how to increase it

Customer Lifetime Value is one of the most important yet undervalued metrics in ecommerce

Ecommerce customers are worth more to your business than the size of their first purchase. If you build strong relationships with customers, their lifetime value (LTV) is what will really matters. LTV, or CLV (Customer Lifetime Value) is the total revenue a particular customer is expected to generate over the course of their relationship with your business. Improving customer lifetime value should be as important to merchants as increasing website traffic and conversion rate.

In fact, it ought to be a higher priority than customer acquisition. It is easier to sell to existing customers than to acquire new ones. And, what’s more, customers that have bought from you before are both more likely to try out new products, and more likely to spend more money than a first-time shopper.

So returning customers are not only an easier target for your marketing campaigns, but also more valuable to your business with each return purchase. By working to increase LTV, you can boost your revenue and profitability. At the same time, you will be building a loyal customer base that can help drive future growth.

Before we dive into strategies to improve your customer lifetime value, it’s important to know how to calculate this metric so you can measure your success.

How to measure Customer Lifetime Value

Lifetime value is not the most straightforward metric to measure, you need to gather quite a lot of information, some of which might need to be estimates if you have not been tracking customers for a long time. But once you have sourced the data for each step of the calculation it is easy enough.

1. Establish the average order value (AOV) – This is the average amount of money a customer spends on each purchase. To calculate this, divide total revenue by the number of orders.

1. Calculate the purchase frequency rate (PFR) – This is the average number of purchases a customer makes in a given time period. To calculate this, divide the number of orders by the number of unique customers.

1. Work out the customer value (CV) – This is the average amount of revenue a customer generates in a given time period. To calculate this, multiply the AOV by the PFR.

1. Determine the customer lifespan (CL) – This is the average amount of time a customer remains active and continues to make purchases. To calculate this, use historical data to determine how long the average customer remains active.

1. Calculate the customer lifetime value (CLV) – This is the total amount of revenue a customer is expected to generate over the course of their relationship with your business. To calculate this, multiply the customer value (CV) by the customer lifespan (CL).

By measuring CLV, ecommerce merchants can gain insights into the value that each customer brings to their business. This information helps in making decisions about marketing, customer acquisition, and customer retention strategies.

Once you have identified your average customer lifetime value, you have a baseline from which to work to begin improvement.

Five ways ecommerce merchants can improve customer lifetime value

1. Offer personalised experiences

Personalisation is a powerful way to make your customers feel valued and appreciated. Tailor your marketing messages, product recommendations, and other interactions to their individual preferences and behaviour. This will help you create a more engaging and relevant shopping experience that encourages repeat purchases. Tools like Segmentify can help you manage your customer data to create relevant segments.

One effective way to personalize your ecommerce store is to use your data to create customer segments. Then target these segments with specific marketing campaigns. You can also use customer data to recommend products that are likely to appeal to each individual shopper, based on their past purchase history and browsing behaviour.

2. Provide exceptional customer service

Customer service is another key driver of customer LTV. When customers feel that they’ve received exceptional service, they’re more likely to return to your store in the future and recommend it to others.

To provide the best customer service, make sure that you have a robust support system in place. You needed to cover all the bases customers expect to be able to use. This includes email, phone, and live chat support. A helpdesk system such as Gorgias will allow you to manage all of these lines of communication in one dashboard. Respond promptly to customer inquiries and complaints, and be proactive in addressing any issues that arise. Make sure that your website and checkout process are user-friendly and easy to navigate. And ensure your return policy us clear and simple.

3. Build a loyalty program

Loyalty programs are a great way to incentivise repeat purchases and build a loyal customer base. By offering rewards for purchases, referrals, and other actions, you can encourage customers to engage with your brand more frequently and spend more money over time.

When designing your loyalty program, make sure that the rewards are meaningful and achievable. They also need to be tailored to the needs and preferences of your target audience. With a platform like LoyaltyLion, it’s easy to create a customised loyalty scheme. Consider incentive options such as exclusive discounts, early access to sales, and other perks that will make your customers feel special and appreciated.

4. Upsell and cross-sell

Upselling and cross-selling are two effective strategies for increasing the average order value and driving repeat purchases. Recommending complementary or upgraded products at the point of purchase, will encourage customers to spend more. This also helps customers discover new products that they might not have otherwise considered.

To make upselling and cross-selling more effective, make sure that your product recommendations are relevant and personalized to each customer’s needs and preferences. Use data to identify which products are most likely to appeal to each individual customer. Provide clear and persuasive messaging that explains why the recommended product is a good fit. You could implement an ai-powered product discovery tool such as Klevu which enables merchants to make data-driven personalised product recommendations for each customer.

5. Focus on retention

Finally, it’s important to remember that retaining existing customers is often more cost-effective than acquiring new ones. You can improve customer lifetime value and build a sustainable, long-term business. Focus on retention and nurturing your existing customer base.

To improve retention, consider how you could make greater use of strategies such as email marketing, social media engagement, and targeted promotions. Keep your customers engaged and excited about your brand through regular contact that makes them feel valued. Offer exclusive content, discounts, and other perks that are only available to your loyal customers. Gather data to identify which retention strategies are most effective for your audience. Use this knowledge to grow your loyal customer base.

How can Calashock help with customer retention?

Improving customer lifetime value is a key goal for ecommerce merchants. Winning the loyalty of your customers beyond the initial purchase is vital to growth, and far more effective than focusing solely on acquisition. There are many effective strategies that you can implement to help you achieve this goal. By offering personalized experiences, providing exceptional customer service, building a loyalty program, upselling and cross-selling, and focusing on retention, you can create a more valuable and loyal customer base that will help drive your business forward.

At Calashock we have over 13 years of experience helping ecommerce merchants to grow their businesses. Both through ecommerce web development and consulting on strategy. Whether you want to re-platform your store, need technical expertise on a custom project, or need help implementing the strategy to increase customer lifetime value. Get in touch with our expert team to discuss your ecommerce needs and see how we can help optimise your store and grow your business.