Customer lifetime value is a key metric that helps e-commerce businesses measure customer loyalty and the potential revenue from each customer. It is also one of the most challenging metrics to measure, let alone increase. In an increasingly competitive market where consumers have more choices than ever before, e-commerce businesses need to adopt strategies that will result in loyal customers who keep coming back time and time again. As such, increasing customer lifetime value is the ultimate goal for any e-commerce store or brand.
In this post, we will discuss a simple method for calculating Customer lifetime value (CLV or LTV) and 7 strategies you can put in place to improve it.
How do you calculate customer lifetime value?
There are a few different methods that can be used to calculate customer lifetime value (CLV). The most common approach is to simply take the total revenue generated by a customer over their lifetime and subtract the costs associated with acquiring and servicing that customer. This gives you the net profit contribution from that customer.
Keep in mind that measuring customer lifetime value may be challenging. If you've attempted to find out your CLV in the past, you've probably been bogged down by complicated algorithms and formulas. Customer behaviors are difficult to predict and appear random at first glance, making it an inherently complex measure to track.
Before you can work out how to increase Customer lifetime value, you must first be able to accurately measure it. This will depend on your business model, product or service, and customer type, but it’s important to understand the factors that contribute to how long a customer stays with you. Some of these factors will be within your control (e.g. the customer retention rate), and others will be outside of your control (e.g. the average lifespan of your product).
The three crucial pieces of data you must track down to determine the customer lifetime value for each of your customer segments are average order value, purchase frequency, and customer value.
Average order value (AOV)
The average order value (or AOV) is the average amount of money that a customer spends every time they place an order. To find this figure, you simply need to divide your total revenue by your total number of orders.
To determine how much money you've made through your store, look at your sales by month. Divide your total sales by your order count for the past year to get this information.
Average Order Value = Total Sales / Order Count
The frequency of orders is the average number of orders placed by each customer. Using the same timeframe as your average order value calculations, divide the total number of orders by the total number of unique customers to determine your purchase frequency.
Purchase Frequency = Total Orders / Total Customers
Total Customer Value
The average monetary value that each customer contributes to your business over a specified period is termed customer value. To determine customer value, you'll simply need to multiply the average order value by the frequency with which people purchase from you.
The value provided to customers is equal to the average order value times the frequency of purchases.
Customer Value = Average Order Value x Purchase Frequency
Calculating the lifetime value of a customer
Customer lifetime value is calculated then by taking your customer value and multiplying it times the average customer lifetime.
The average customer lifetime is the length of time that your relationship with a customer typically lasts before they become inactive and stop purchasing permanently.
It's crucial to recognize the distinction between contractual and non-contractual businesses when it comes to customer lifetime.
The most common of these two are non-contractual online stores. For this type of store, once a purchase is made the transaction may be effectively over. It is difficult to identify when an active customer (someone who continues to make purchases) becomes an inactive customer (someone who will no longer purchase from your business).
Subscription-box-based businesses, on the other hand, fall into the contractual category. With a contractual business, you know when a client becomes inactive because they announce it when they finish their subscription or contract. It's much easier to gauge your typical consumer lifespan with a contractual business.
If you don't have enough data to estimate the average customer lifetime for a new store or one that has been around for a few years, you can still get some useful results by using reliable industry benchmarks. For newer stores, for example, a three-year lifespan should be a good estimate.
With all this in mind, here are seven tips you must consider to help increase your customer lifetime value:
7 Tips You Must Consider to Increase Customer Lifetime Value in Ecommerce
1. Build a strong brand and engage with customers
As with any relationship, you must first win over your customers before they become loyal customers. In order to do this, you must first ensure that you have a strong brand with an engaging customer experience. From the moment a potential customer first interacts with your brand, you must be consistent across all customer touchpoints. This means having a clear, memorable brand identity that is present across your website, marketing materials, social media, and customer service channels.
It also means creating a customer experience that is personalized and tailored to each customer’s needs. Tactics like personalized video messages across the customer journey are essential. You don't need to record multiple videos, tools like Maverick make it easy to scale your personal video interactions by leveraging AI and deep tech. Handwritten notes, personalized gifts, and effective communication as well are very helpful to win over the heart of the customer.
Many brands are now investing in integrated customer experience platforms as well. These are software solutions that help companies unify their customer experience across multiple channels. This can include everything from managing customer data and leads to creating consistent branding. Regardless of which platform you choose, make sure that it allows you to create a personalized experience for each of your customers. This ensures that all interactions with your brand are consistent and, therefore, customers are more likely to engage with your brand.
2. Start a loyalty program
A good way to get customers to convert for the first time is to offer coupons or deals. But once you get those customers, how do you keep them around? A customer loyalty program is one of the most effective ways to boost sales and retain customers, and 93% of businesses have one. In addition, 84% of consumers believe that earning rewards influences their purchasing decisions, and 66% of them agree.
Awarding credits, rewards and gifts to your most committed customers is one way to show them that you care. You can encourage upselling and cross-selling by providing different rewards such as purchasing credits for following the brand on Instagram, buying new products, leaving reviews, or for customers' birthdays. Customers can then use the credits to freely redeem your products, merchandise, and other freebies.
3. Invest in improving customer experience
No matter what industry they were in, brands were forced to change their approach to customer experience thanks to the recent global pandemic. Almost all e-commerce businesses had to adapt to new circumstances and heightened competition. The winners responded by focusing on customer needs and providing emotionally satisfying experiences.
95% of customers who describe a company's customer service as 'very good' are likely to recommend the company, according to recent data from The XM Institute.
It is essential to consistently nurture and care for customers. One excellent way to improve customer experience and satisfaction are to thank customers in a personalized way. The more personal and human it feels, the better relationships you'll be able to develop with your customers. For example, send all your customers personalized video messages at scale. Greet each customer by name after they complete a purchase, if they abandon the cart, welcome them to your newsletter, win them back, etc.
With tools like Maverick, you don't need to record one video for every customer. You only need to record once and Maverick uses AI and Deeptech to generate thousands of unique personalized versions where you greet each customer by name.
4. Continuously A/B test your site and ads
Simply put, A/B testing is the process of monitoring two different versions of something, such as a button or ad copy, and measure which performs better. It’s an important e-commerce best practice because it allows you to make data-driven decisions about your marketing strategy. What you’re looking for is not just a higher click-through rate, but rather a significant increase in overall conversions.
The good news is that increasing overall conversions can also help increase customer lifetime value. When determining which version of your site or ads performs better, you want to create two variations. The first variation is your original copy or design, and the second variation is the new variation that you want to test. You can then analyze the results to determine which variation is likely to lead to more conversions.
5. Offer VIP customer service
There are many ways to increase customer lifetime value, but one of the simplest and most effective is to offer VIP customer service. This can include anything from early access to new products and promotions to special discounts and incentives, but the important thing to remember is that it needs to be something that your customers want.
You can also look for ways to improve your customer service that don’t cost a lot of money, such as improving your response times or adding more language options to your website. If you already offer great customer service, but it’s not VIP-level, you can also try improving your current program. 60% of internet users claim that poor customer service is why they hesitate when purchasing items online. 36% of respondents in a US survey stated that “great customer service” is a motivator to recommend a brand online.
Which channels should you invest in to provide better support? Is it self-service? Does your customer prefer social media or website live chat? Research what channels your customers prefer and invest in them.
6. Run effective email marketing campaigns
Email marketing campaigns are an effective way to engage with and retain customers. They allow you to send consistent, personalized content to your customers on a regular basis. This can include anything from product updates and sales to helpful tips and advice. You should always be sending emails to your customers.
Many brands are now using automated email marketing campaigns that are sent out at certain intervals. These can be programmed to go out on a daily, weekly, or monthly basis. A/B testing is a great way to test different email marketing strategies. You can create two email campaigns that are almost identical, but have one variation. Then, you can analyze the results to determine which campaign resulted in more clicks and conversions.
In order to improve your email open rates and click rates, you can incorporate new creative tactics that will help you stand out. Research from Experian found that open rates rose from 7% to 13% when marketers used the word “video” in the email's subject line. So include personalized videos in your email marketing strategies. Use AI tools like Maverick to scalably send personal video messages through email to all your customers without spending hours recording.
7. Up-selling or cross-selling
You can boost your sales by offering prospects additional products or services once they've made a purchase or signed up for a service. Offering a premium or upgraded version of a purchased item or other items can be a good way to get customers coming back and developing an affinity with your brand.
Upselling can increase the lifetime value of a customer. On one hand, an existing customer is 60% to 70% likely to buy from you, compared to a 5% to 20% chance of selling to a new customer. On the other hand, upselling leads to higher average order values and thus increases customer lifetime value.
Cross-selling is often muddled with upselling but there's a difference. Cross-selling refers to offering an item that compliments the original product, whereas upselling refers to offering an upgraded version of the same product. A server might ask, “Would you like fries with that?” if he's cross-selling. In contrast, an upselling server might ask, “Would you prefer Hendrick’s gin instead of well gin?”
Customer lifetime value is an important metric for any business to track, but it is often challenging to measure. Once you’ve started implementing some of these strategies mentioned before, you’ll want to revisit your customer lifetime value report to see how it has changed. Hopefully, these seven tips will help you increase your customer lifetime value and in turn, help grow your business.