Stop overlooking customer lifetime value in eCommerce
- •What is customer lifetime value (CLV)?
- •How to calculate customer lifetime value
- •The importance of customer lifetime value
- •Example of customer lifetime value
- •Customer lifetime value in marketing and why eCommerce businesses shouldn’t overlook it
- •How to improve customer lifetime value
- •Improve your eCommerce margins with Airwallex
Selling products or services to an existing customer is much easier than pushing sales to a potential customer (i.e. lead). Because of this, you want to ensure current customers are satisfied with your eCommerce business.
When customers are satisfied, you retain their business — and this helps you regain the investment you made to earn them as a customer in the first place.
Retaining customers not only helps you maintain a consistent cash flow but also relieves the pressure to constantly seek new business. And one of the best ways to retain valuable, satisfied customers is by measuring customer lifetime value (CLV).
Once you study your CLV and figure out how to improve it, watch your revenue increase over time.
What is customer lifetime value (CLV)?
Let’s learn the definition of customer lifetime value. CLV (also abbreviated as CLTV) is a metric representing the total amount of profit a business can expect from one customer’s account.
Throughout your business relationship with a certain account, you can predict the customer’s lifespan and compare that number to their revenue value. This comparison reflects CLV.
So, the longer a customer buys from your business, the greater their CLV becomes.
When understanding customer lifetime value, think of it this way. Have you ever purchased a service or product from a business but were disappointed in either (or both)? You likely didn’t continue buying from that business because you feared being let down again.
When customers are satisfied with your offerings — or more specifically, the offerings they purchase from you — they’ll continue to buy from your business. That’s why customer success and support teams pay attention to CLV. It helps them identify what the business should do differently to make customers happier.
Customer support representatives can influence what happens during a customer’s journey by making recommendations or solving problems. And in turn, customer loyalty improves.
However, CLV is also a useful metric to reference when making business decisions. You can use it to identify valuable customer segments and change your business model accordingly.
How to calculate customer lifetime value
Before we dive too deep, let’s learn how to calculate customer lifetime value.
Here’s the customer lifetime value formula:
Customer lifetime value = (Customer value ✕ Average customer lifespan)
To find your CLV, you need to determine customer value. You can find this value by calculating your average purchase value and then multiplying that by your average number of purchases. You’ll likely have to look at data in your business’s computer system and run it through a software program for accuracy.
Then, calculate your average customer lifespan. Once you have that value, multiply it by the customer value. You’ll then have your customer lifetime value calculation.
In summary, follow these steps to find CLV:
Find customer value (average purchase value ✕ average number of purchases)
Find customer lifetime value (customer value ✕ average customer lifespan)
The importance of customer lifetime value
CLV is important for several reasons. Here are some of the most important aspects when considering your eCommerce business’s CLV.
The longer a customer buys products or services from your business (also referred to as a customer life cycle), the more valuable they are to you. The length of their life cycle directly affects the revenue you earn from them.
CLV identifies how much revenue your business earns from specific customers. So, tracking products and services that satisfy high-value customers helps you learn how to improve your CLV and thus gain more revenue.
Boost loyalty and retention
As we’ve noted, CLV helps businesses identify issues. These issues could be concerning trends, such as cancelled subscriptions or a high number of returned products. And when you address those problems through action items (e.g. event, task, activity), both customer retention and customer loyalty should increase.
Target ideal customers
Once you know the lifetime value of a customer, you also have information on how much they’re willing to spend on your business’s products or services over time.
Depending on the size of your business, the average customer could spend anywhere from USD20 to USD200 to USD2,000. Once you know the average range of money that customers spend, you can develop an acquisition strategy to target customers who spend the most on your offerings.
Reduce customer acquisition costs
Turning leads into customers can be expensive, but attracting them in the first place is also costly.
According to an article by the European Business Review, acquiring new customers is far more expensive than retaining them. This is why it’s important to identify valuable customers and nurture your relationships with them.
Doing so will help you increase your profit margin, improve your CLV and reduce the amount you currently spend on customer acquisition.
Example of customer lifetime value
Two of the most prominent CLV types are predictive and historical CLV.
Predictive CLV is looking at new and existing customers’ buying behaviours with software systems, such as machine learning or regression.
The predictive CLV model helps your business by identifying key factors:
Products and services that bring in the most money
Improvements to make for better customer retention
Historical CLV uses past data to predict the value of a customer, regardless of whether they continue buying products or services from the business in the future.
The historical CLV model focuses on the average order value, which you then use to determine customer value. This model is mostly useful if customers interact with your eCommerce business only over a particular period rather than long term.
However, this CLV model has disadvantages because not all customer journeys are the same.
Any customer who the historical model determines is valuable might skew your data. This is because per the historical model, valuable customers are active customers.
But not all customers remain active — many become inactive. The same goes for inactive customers with data you may have overlooked. They eventually could become active, which also could skew your data.
Customer lifetime value in marketing and why eCommerce businesses shouldn’t overlook it
Determining CLV is an essential metric for eCommerce businesses wanting to improve customer retention and loyalty. It allows businesses to know which customers spend the most time browsing and buying products or services — and thus who’s most loyal to the brand.
Let’s go over what that entails.
How to improve customer lifetime value
Now that you know what CLV is and how to calculate it, you might wonder how to give it a boost. Here are six strategies.
Improve your onboarding process
Onboarding customers is the process of getting them acquainted and involved with your brand. It involves informing them about what you do, why you do (or offer) it and why it’s beneficial for them to remain engaged with your business.
The onboarding process happens right after a customer makes their first purchase — typically within a few days. So when a customer returns to your website to browse items or subscribe via email, they’re gradually learning about your business and deciding whether they want to continue buying from you.
You can increase the likelihood of retaining a customer by using the data they provide to both yours and their advantage. Using their data, you can offer curated products or services with deals they may be interested in. You can also reach out to them via email to ensure the service or product they bought meets their expectations.
As a result, you have a solid framework to support long-term customer relationships.
Increase your average order value
Increasing your average order value is another way to improve your CLV.
When a customer makes a purchase, there are methods to increase their final payout. For instance, you can offer products related to or supporting those they’re currently buying.
Classic upsell and cross-sell methods work extremely well to increase average purchase values, which ultimately increase your CLV.
However, if your business is subscription-based, you can increase your average purchase value by encouraging customers to switch to a long subscription cycle, such as annual or biannual. In turn, their final payout (and your overall revenue) is higher, and your CLV simultaneously increases.
Build long-term relationships
All relationships are built on trust — and this includes customer relationships. If customers believe your business offers the ideal products and services for their needs, they’ll continue coming back.
Customers are more likely to maintain relationships with businesses that care about fostering personal customer connections rather than focus solely on improving ROI. The goal is to form connections with people that mean more than simply earning money.
When you care about the value of your products and services, as well as how they support customers’ lives (and perhaps their happiness), they’ll likely want to continue doing business with you. Personal connections usually last much longer than business ones.
One way to build personal connections is by engaging with customers on social media rather than constantly sending targeted ads. You can even create meaningful dialogue with your target customer bases via to discover more about their interests. And those interests reflect the products and services they’ll truly enjoy.
Sending free gifts is another way to help your eCommerce business stand out. When you stand out, customers remember you and are more likely to come back. When customers keep coming back, your total average revenue and profit increases — and thus your CLV.
Embrace customer advice
Customers often have great insights regarding how businesses can improve. So when it comes to finding out what customers want, it makes sense to reach out to them directly.
When you get a customer talking, it’s always better to listen than to tell. Telling customers what they should want very rarely works. Listening to their needs and what they tell you they want works.
For instance, you can create a poll on any new products or services you have in the works and see what customers think. You don’t have to list specific options for them to choose from. Rather, you can leave blank fields for them to express their thoughts freely.
It’s unlikely that all customers will participate. But the ones who do (usually the most loyal customers) will give you invaluable information about how to improve your offerings. Then, if a customer comes up with an idea that you end up using, give them credit and/or a gift to show your appreciation.
Even if most of the customer advice you receive isn’t something you want to hear, taking the time to listen and thoughtfully respond matters. In the long run, your CLV and customer loyalty will increase.
Empower easy connections
When a customer lodges a complaint or posts a negative review, it’s vital that your employees respond promptly. You should aim for within an hour or less. This isn’t always feasible, but make a habit of striving for the shortest time possible.
One way to shorten your response times and facilitate easy connections with customers is through social media. Hiring a team member to actively monitor and manage customers’ comments and concerns will help them feel acknowledged.
Because CLV is based on relationships, you want to bridge the gap between you and the customer. They won’t continue buying from you if they don’t feel heard. If you can enable simple, ongoing connections with them via conversation or something else, your brand will thrive.
Improve customer service
Many consumers think customer service is solely speaking with customer service representatives on the phone after an absurdly long wait time. But it’s so much more than that.
Customer service is omnichannel support, whether by phone, website messaging, social media or email. It’s also fair, appropriate refund and return policies, as well as personalised services for existing customers.
If you want to improve your CLV, find ways to improve customer service and the experience customers have when reaching out about anything they’re unhappy with (or perhaps especially happy with!). This shows that customers — not sales volume — are your main priority.
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