Customer Lifetime Value (CLTV): What It Is & Why It Matters for Ecommerce
Customer lifetime value (commonly abbreviated as CLTV, CLV, or LTV) is one of the most important ecommerce metrics for any business to track. In short, CLTV is a metric that indicates how valuable a single customer account is to your company across their entire “lifetime,” ie. throughout the business relationship.
Keep reading to learn why CLTV is an essential ecommerce metric, how to calculate it, and how to improve it.
The Value of Knowing CLTV for Ecommerce Businesses
There are dozens of metrics retailers can use to measure their success. Yet when it comes to predicting profitability and success over time, few metrics are as important as customer lifetime value. Here’s why:
It helps you identify your most valuable customers. By knowing which customers are most valuable to your business, you can prioritize your customer retention efforts to better serve those key customers, resulting in longer and more profitable customer relationships.
It helps you target your ideal customers. By identifying which existing customers drive the most value for your business, you can focus your marketing and customer acquisition efforts on bringing in new customers in that same demographic.
It informs your customer acquisition spending. By measuring CLTV in relation to Customer Acquisition Cost (CAC), you can accurately measure how valuable a customer is after the expenses of acquiring them, thereby enabling you to make smarter spending decisions.
It helps you identify opportunities for improvement. You can’t improve what you don’t measure. By knowing your CLTV, you can take steps to improve that metric and boost your company’s profitability.
How to Calculate Average Customer Lifetime Value
The formula for calculating average CLTV is actually fairly simple, but you will need a few key pieces of data on-hand before you can get started:
Average Purchase Value = Total revenue over a set period of time (typically one year) divided by the total number of orders in that period
Average Purchase Frequency = The number of orders in that set period divided by the number of unique customers who made a purchase
Customer Value = The Average Purchase Value multiplied by the Average Purchase Frequency
Average Customer Lifespan = The sum of all customer lifespans divided by the total number of customers
Once you have these metrics available, you can calculate your average customer lifetime value using the below formula:
CLTV = Customer Value x Average Customer Lifespan
How to Calculate Individual Customer Lifetime Value
For many retailers, knowing the average CLTV is enough to guide important business decisions. That said, there may be times when you need to calculate the CLTV of a single customer. In these scenarios, you can use the following formula:
CLTV = (Customer’s Average Purchase Value x Number of Annual Purchases) x Duration of the Customer Relationship in Years
How to Improve Customer Lifetime Value
Regardless of whether you are calculating average or individual CLTV, you may discover that your customer lifetime value is below where you would like it to be. Fortunately, there are steps retailers can take to nurture customer relationships and improve their CLTV:
Optimize your marketing strategy. Calculating individual CLTV will give you a solid understanding of which customers bring the most value to your business. You can then use that data to focus your marketing and acquisition efforts on bringing in similar customers.
Improve your onboarding process. It’s true what they say: you never get a second chance to make a first impression. By dazzling your customers during the onboarding process, you increase the likelihood of them making higher value purchases and sticking around longer.
Enhance your customer experience. There is a lot that goes into creating a positive customer experience: website design, ease of ordering, shipping and delivery timelines, customer service, loyalty programs, and more. By offering an amazing customer experience, you incentivize customers to remain loyal and spend more with your business.
Increase your average order value. Two of the most effective ways to achieve this are upselling (buying a more expensive comparable product) and cross-selling (buying related or complementary products).
Ecommerce SEO & PPC Can Help You Improve CLTV
By focusing your efforts on attracting and retaining the right customers, you can improve your customer lifetime value and build a more profitable, successful business.
Ecommerce SEO and PPC are two important strategies you can leverage to optimize your marketing, acquisition, and retention efforts and ultimately boost your CLTV.
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