What is Customer Lifetime Value?

The owner of an online store, choosing to measure certain indicators, can provide himself with a lot of useful data to grow his business and understand customer behavior and market trends. One such indicator is Customer Lifetime Value. It provides valuable insight that can pay off and benefit any business enterprise.

Customer Lifetime Value – table of contents:

1. What is Customer Lifetime Value?
2. Why measure CLV?
3. How to calculate CLV?
4. How to increase customer lifetime value CLV?

What is Customer Lifetime Value?

Customer Lifetime Value (CLV), also known as Lifetime Value (LTV), defines the value that a company can attain from a relationship with customers over their lifetime. Examination of such parameters may outline how much revenue, on average, an entrepreneur will achieve thanks to the whole partnership with a customer. Comparing CLV to the cost of acquiring a customer will provide data to estimate the time it takes to regain the investment that has been put into acquiring a new customer.

Why measure CLV?

CLV also singles out buyers with whom a company has a long-term relationship so the entrepreneur knows which customer segment is most valuable. This way it can better tailor its offerings to them and develop its customer service department to increase consumer satisfaction.

Caring for customers makes loyal and true customers. The entrepreneur does not have to spend the budget on acquiring new and uncertain clients. In addition, such consumers are more likely to recommend the store to friends or write a positive review and return to the store’s website to buy again.

Based on information about the profile of most valuable customers and the time they have been with the company, you can better refine your target audience to attract genuine clients who resemble your regulars and also will be interested in your product range.

How to calculate CLV?

To calculate the CLV you need two variables. First, the average customer lifespan (ACL) is the average number of days between the first and last order of all your customers, measured in years. 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.

Next, average customer value (ACV) is the average revenue value that a customer contributes to your business during a given timeframe. It can be determined by multiplying the average order size (AOS) with the average order frequency (AOF). When you have these two variables (ACL and ACV) you can calculate CLV.

For example:

How to increase customer lifetime value CLV?

Taking care of an existing customer is more profitable for a company than investing money in acquiring new ones. The best ways to increase CLV are:

Increase the average order value

AOV (Average Purchase Value) is the amount a customer spends on average in a store. It is calculated by dividing revenue by the number of orders.

Ways to increase AOV are:

• offering free delivery,
• cross-selling and up-selling,
• offering discounts/rebates,
• implementing a loyalty program.

Improve Average Purchase Frequency Rate (APFR)

This value indicates how many times a customer makes a transaction in a given period. APFR is calculated by dividing the number of purchases by the number of customers.

Ways to improve it:

• offering discounts/discounts on subsequent purchases,
• possibility to save products to a wish list,
• creating advertising campaigns based on previous orders and customer interests,
• dividing customers into particular segments, e.g. by interests,
• retargeting campaigns.

Extend retention period, or customer life expectancy

This figure determines how long a customer is loyal to a brand.

Ways to extend the retention period are:

• loyalty programs,
• building a community around the brand, e.g. in social media,
• attracting customers and increasing their engagement, e.g. through newsletters, Facebook posts.

Summary

Customer Lifetime Value CLV is a handy tool that can provide an entrepreneur with a lot of valuable information. Knowing your most loyal customers, allows you to re-examine your target audience and segmentation, so your brand can better undertake marketing efforts.

Read other articles about ecommerce analytics:

• E-commerce analytics – why it’s important?
• What is Bounce Rate – 7 Ways to Improve
• What is Cart Abandonment Rate?

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