Understanding Customer Lifetime Value for eCommerce Success
In your quest for eCommerce success, it is important to understand and accurately measure relevant metrics. While sales and revenue might be go-to metrics for tracking short-term performance, it’s important to look beyond this. A revealing metric that often goes unnoticed is the Customer Lifetime Value (CLV). Not sure why knowing how to do a customer lifetime value calculation is important and how to calculate it? Don’t worry, these ideas from an article by Shopify will guide you.
Bottom Line: Understanding the Customer Lifetime Value (CLV) can provide insights into your eCommerce’s businesses present and future performance. It paints a clear picture of how much value a customer brings to your business over time, effectively separating the wheat from the chaff.
Looking towards the future, it is likely that as eCommerce technologies advance, we might see new ways of calculating the customer lifetime value which makes use of consumer behavior and automation, further simplification of the process, and possibly even predictive calculations of CLV based on real-time data.
Why Calculate Customer Lifetime Value?
Calculating CLV offers greater insights into how much value a customer will bring to your eCommerce business in the long run. This awareness makes it possible for businesses to strategize effectively.
Some advantages of understanding your CLV are:
- Driving repeat sales and revenue: CLV can help predict which customers are more likely to make repeat purchases in your store. This can help to increase customer satisfaction, and target high-value customers more effectively.
- Boosting customer loyalty: Strategies that arise from understanding your CLV can lead to improved customer support, product pricing, and referrals, as well as better loyalty programs.
- Reduces your lifetime value to customer acquisition costs (LTV/CAC) ratio: By improving your customer lifetime value, you can measure and improve the efficiency of your sales and marketing strategies.
Calculation of Customer Lifetime Value
- Segment customers with RFM: This involves organizing your customers by Recency, Frequency, Monetary Value (RFM), to determine from least valuable to the most valuable.
- Determine average order value: This is calculated by dividing your total revenue by the total number of orders.
- Figure out average purchase frequency: This is the average number of orders placed by each customer. This can be determined by dividing the total number of orders by the total number of unique customers.
- Calculate customer value: This can be determined by multiplying the average order value by the purchase frequency.
- Multiply customer value by average lifetime value: This can be achieved by taking your customer value and multiplying it by the average customer lifespan.
Putting Your CLV to Work
Knowing your CLV can help you build more efficient and smarter marketing campaigns. You can utilize your CLV in various ways such as:
- Minimize cost per acquisition
- Maximize return on investment
- Set budget for paid ad campaigns
- Calculate the maximum bid for campaigns
- Identify upselling opportunities
Finding Loyal Customers for your Business
Finding the right customers is crucial to the success of your eCommerce business. Calculating the value of your customers helps in crafting effective campaigns to target and win those customers that make a significant difference to your bottom line.
