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Customer Lifetime Value – CLV

Summary #

Customer lifetime value (CLV) is one of the key metrics to track as part of your e-commerce business. CLV is a measurement of how valuable a customer is to your company, considering the whole relationship with that customer, not only the first purchase.

Before anything, it is necessary to start capturing and measuring the business data needed to calculate the CLV and other important metrics of your business.

Understanding and tracking the CLV will make your company more profitable and will give you more insight into how much you can spend on acquiring new customers. And it will also make it possible for you to get feedback on the improvements you make to your business.

What is Customer Lifetime Value (CLV) #

Let’s say your customer John made his first purchase 2 years ago. He bought from you 2 more times for the total of $700 in the following few months and didn’t come back again. So, your Customer Lifetime Value for John was $700 in this case. Simple!

Let’s go to explain this in more detail.

Customer lifetime value or CLV is the revenue that our business gets from one customer throughout the time of being our customer.

Since most companies, especially e-commerce, work on a scale, we generally use the average value of Customer Lifetime Value. This value can be averaged across all of our customers. Or we can even calculate it for each of our customer segments, if we have them, and have different CLV per customer segment.

Why is customer lifetime value so important #

In the first place, to know directly how much money we get from one user. This allows us to better plan our budgets and understand how much we can give for the acquisition of that user.

Another important thing is that it very well reflects the quality of our relationship with clients. How satisfied they are with our products and offer, how easy our store is for them to use, how satisfied they are with the service, delivery, communication, and everything else that makes a business good for its customers.

Question for you.

How do you measure the success of your eCommerce company now? Do you focus on the number of orders or traffic?

These are certainly the two most popular metrics shop owners monitor to notice short-term campaign results. But they do not provide us with a complete picture of our business. And can lead to flawed conclusions.

What product or service do you sell? If we sell products where we expect repeat purchases from existing customers, CLV is a key metric for our business success.

How to measure customer lifetime value #

It all starts with data.

E-commerce businesses with growth in mind, at least need to be data-informed. This is the first level for data-driven organizations and is an absolute must if you want to have a successful eCommerce business.

Let’s first figure out which information points we need to gather. And this is the tricky part. Applying the formula and calculating the Customer Lifetime Value is very easy if you have all the data.

There are 3 main data points we will have to gather and calculate.

  1. Average Order Value (AOV). This is a value we usually calculate, but some systems have it calculated already. But any e-commerce system will have a list of orders. If it doesn’t, please change your system! You can ask us if you need advice! So AOV is a sum of all of the orders in a period (you can take one month), divided by the number of orders. If you just started tracking this data, consider measuring this value per quarter.
  2. Number of Transactions Per Period. This value is per customer, don’t get confused. It tells us do customers buy several times a week, or only once every year. This is driven by the type of business and also by the loyalty of customers to your brand. The frequency of visits has a big impact on CLV.
  3. Customer life span or retention. Understand and measure how long the average customer stays and buys from you. It is important that you can attribute purchases to the same customer so you can see when was the first purchase, and when was the last one. Technology businesses or car brands, usually have some loyalty so the customers stay for years if not longer. Others, like retail shops, might be a matter of convenience and customers change providers quite often.

How to know if the customer won’t come back anymore? You can compare the average frequency of purchases and if your customer didn’t come back after a certain multiple. You can use 5x but it depends on the type of business.

For a more in-depth look, you may want to break down the customer lifetime value in your company per quarter. Or segment your customers in a different way. This can give greater insight into what’s working well with high-value customers, so you can work to replicate that success across your entire customer base and increase the sales for your company.

Important to understand!

There are multiple definitions of CLV. Basic calculations that only look at revenue and more complex equations that factor in gross margin and operational expenses like COGS (Cost of Goods Sold), shipping, and fulfillment. Marketing expenses can be included but are sometimes left out if they are too variable and they are being tracked through Customer Acquisition Cost (CAC) metric.

The calculation we are using in this article is based on revenue. The majority uses this definition and we also prefer it because of its greater simplicity and less dependence on other factors.

How to implement CLV measurement in your eCommerce store #

You could measure the values directly. Implement the data gathering and calculations either through a module or write custom code to do it. The options usually depend on the underlying platform and what other KPIs you want to track except the customer lifetime value.

Another good option is to export the data to a CRM/ERP which can do this for you. There are many good solutions but they can get quite expensive and complex if you are just beginning and do not have unlimited resources.

How to measure CLV with WooCommerce #

WooCommerce is a really popular e-commerce website platform. With more than 5 million shops online, which is 5x more than the runner-up, Shopify.

Even though they provide a very convenient dashboard, you still need to do some legwork in order to track CLV. Thankfully there are modules that can help with that.

WooCommerce plugins that help calculate CLV

  1. Usersinsights. Their solution provides more than just calculating the CLV, they can also help you identify your most valuable customers so you can focus your efforts on acquiring and supporting this group of customers.
  1. WooCommerce Customer History. With this plugin, you can see how your customers use to browse your store prior to purchase, and calculate the total customer lifetime value.
  1. Enhanced Commerce. This is a module that will help you export the purchasing data to Google Analytics, and there you will be able to further manipulate it. One of the downsides here is that you won’t have a 100% accurate data representation, because you might cancel some orders, or if a customer has a Google Analytics blocker, it can prevent the data from getting to google.
  1. ExactMetrics and MonsterInsights can also help, but they depend on Google Analytics as well, and is a bit of work to set it up.

How to calculate customer lifetime value #

Now since we have all the data ready, calculating the customer lifetime value comes easy.

CLV = Average Order Value x Number of purchases per period x Average customer lifetime.

There is no clearly standardized way of measuring this value in practice, although the definition itself is quite clear, very often we do not have enough data, so approximations and predictions are used.

The most important thing for the success of your system is the early establishment of a system for collecting and analyzing data, as discussed before. And at all times, try to make sense of the numbers you get and the correlation to your actions and your growth strategy.

What is a good value for customer lifetime value #

There is no universally specific number that is the standard. It depends on the type of the business, the type of user, the implementation of the system, and many other parameters.

The key thing to understand is that you need to be net positive. That means you need to generate profit from your clients in order to make your company sustainable in the long run. 

What this means, the profit margins you get from your Customer Lifetime Value needs to be higher than the acquisition price for a user. And if we are talking about general rules of thumb, it’s good to have your profit margins 3x bigger than how much you pay to acquire a customer.

How to increase customer lifetime value #

The total amount a customer spends with us is made of two components. The first one is, how much on average she spends. And the second one is, how many times will she come back to purchase with us. Increasing any of the two will result in the CLV increasing.

For this to happen, the base is to have a great business. You will naturally have a higher CVL.

Define who is your target customer and what subsegment is your best client. Then deeply understand their needs. The last thing to do is provide the maximum value for them that you possibly can.

If you do only that, your customer lifetime value and retention will grow on their own.

Diving deeper into strategies to increase your customer lifetime value.

First of all, the quality of the product itself. Everything we promised the customer on the sales side, we have to fulfill. Description and features are the easier part of the job, but communicating benefits is probably the part that deserves the most sales…

Your sales process doesn’t end with the product sale. You need to make sure that the customer used the product correctly and get feedback on satisfaction and value perceived. 

  1. Invest in a good user experience. Your customer will always come back to the place he felt valued and where he was treated fairly. For example, this can be a simplified and transparent return policy you communicate on purchase. Or a fast interface in your e-commerce application.
  2. Remind customers you are here. Find a way to easily reach out to your customers through push notifications, SMS, or email. For example, you can send them useful resources or a coupon code for their birthday.
  3. Simple onboarding. Make sure your onboarding process is simple and unobstructed. Do not take unnecessary data and create long registration or checkout forms.
  4. Run a loyalty program to improve repeat purchases. Rewards and special discounts on products increase purchase frequency. Together with gamification, loyalty can be a very powerful motivator.
  5. Reward your most loyal customers. Give them something for free and build brand loyalty
  6. Provide omnichannel experience and support. Be present on the web, on mobile phones, on smartwatches, and in regular offline retail, while having the data interconnected.
  7. Make the product return process simple. Consumer research shows that free shipping (96%) and free returns (76%) present important consideration factors when shopping online.
  8. Increase the offer. Offer you customer upsell and cross-sell options to increase the value of each purchase. If you are selling mobile phones, offer a protective case to go with it, or offer additional insurance.
  9. Reach out. Send your customers relevant news, valuable content, or special offers
  10. Be active on social media. Invest in your marketing and expand your audience
  11. And many other ways, this is just scratching the surface. Ask your customers for feedback on what to improve and how to better serve them. That is the right way to increase the customer lifetime value.

What to do with a new shop and no data #

Try to find data from the industry you are in. At least for the beginning, you might be able to find out the purchase frequency and calculate how much you pay for acquiring one customer and do your initial math from there.

Where can you find that information? Except for googling, there are different resources and data providers who can give you different levels of insights but they usually charge for that. And if you are a smaller business, you probably won’t spend $10.000-$50.000 for deep insights and market reports.

Key Takeaways #

  • CLV = Average Order Value x Number of purchases per period x Average customer lifetime
  • Be data-driven, start measuring customer lifetime value and related data in your system at once
  • Make sure your customer lifetime value has a value that makes you profitable. Track it continuously
  • Implement some of the given examples and improve your business to grow your CLV

Video #

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