Running a profitable ecommerce business is more than great customer service.
You could do everything right, from creating quality products to spending all your marketing dollars to gain new customers. But if you don't retain your customers, your business will continue to lose profits.
Therefore, keeping track of your Customer Lifetime Value (CLV) is essential if you want to maximize your profits and minimize your marketing expenses. In this blog, we're going to walk you through what CLV is and how to increase it to drive profit.
What is Customer Lifetime Value?
Customer Lifetime Value (CLV) is an important metric that estimates the total profits generated per customer throughout their relationship with your business. Retaining a customer for the long term leads to higher net profits, which in turn leads to higher CLV.
Estimating your CLV can help you find answers to questions like:
- How much should you spend on marketing?
- Which customer segments should your marketing team focus on for higher profits?
- How do you build customer loyalty that leads to strong customer relationships and future purchases?
But before we get into the specifics of CLV, let’s talk about its different components first.
What Are the Different Components of CLV
If you want to ensure that a customer’s journey with your business isn't limited to a one-off purchase, you have to pay attention to these two components to increase the average customer lifespan value.
Component 1: Acquisition
Pay attention to how you go about acquiring new customers. Is it via social media, paid ads, or organic social? The channel and your acquisition cost directly impact your customer's lifetime value.
The process of converting a lead into paying customers is a tricky one. Higher acquisition rates and lower acquisition costs lead to high CLV.
Let’s take the acquisition strategy implemented by Dollar Shave Club for example.
A combination of affordable subscription models, superior product quality, and innovative marketing campaigns allowed the business to achieve higher customer satisfaction, engagement, and therefore higher retention.
Component 2: Retention
Getting customers to notice your products, and having them carry out one-off transactions, is not enough to scale your business. You have to keep them hooked to turn them into loyal customers.
To retain a customer, you can provide them with exclusive benefits, and make them feel special and appreciated.
Let's look at Amazon’s customer retention strategies. Perks of an annual fee-based subscription, such as 2-day delivery, exclusive deals, and streaming platforms keep customers hooked and encourage them to make repeat purchases. It currently has more than 100 Million Prime subscribers.
Source: Bloomberg
Personalizing a customer’s journey with your business is another way, like how Amazon offers personalized suggestions as per your purchase history and provides you with exclusive product suggestions. A little sense of exclusivity goes a long way.
How Do You Calculate Customer Lifetime Value?
Personalizing a customer’s journey with your business is another way, like how Amazon offers personalized suggestions as per your purchase history and provides you with exclusive product suggestions. A little sense of exclusivity goes a long way.
There are multiple ways to calculate your business’s CLV. Here are the two most common and effective ways:
1. Historical Purchase History
You can track and use customer and product details to find out your CLV. Use certain CRM tools, point-of-sales systems, and other sales tracking systems to gather these variables.
The customer lifetime value formula using historical data of a customer is as follows:
However, this process has its disadvantages. Some customers might not want to continue their journey in the future. This would leave you with a skewed set of purchase and customer data. You do not want to miscalculate your CLV, or your business might bleed resources, and you wouldn’t even know!
2. Cohort Analysis
Here’s another method to predict CLV accurately known as Cohort Analysis. It requires you to segment all your existing customers into different groups, based on their purchase behavior over a fixed period. Tracking these cohorts, and observing how their values evolve, can help you find purchase frequency and trending patterns.
If you use Shopify, the platform will give you this metric right in their analytics dashboard. All you need to do is, log in to your Shopify account, and click on “analytics”. This is how your screen will look like. You can customize your view as per the time period for which you want this metric.
Then, just scroll down until you see customer cohort analysis on your screen.
Click on it and voila, you'll get your customer lifetime value without lifting a finger. Not just that, you can track every granular metric such as the amount spent per customer, average order value, customer retention rate, gross sales, and more!
Factors That Impact Your Customer Lifetime Value
As a Shopify ecommerce merchant, you won't have to calculate your customer lifetime value manually. However, if you want to know the factors that should impact your CLV, here’s a quick breakdown of each:
Average Purchase Value (APV)
APV refers to the average amount spent per purchase by one of your customers. A higher APV leads to higher Customer Lifetime Values, as it increases the total revenue generated for your business per customer.
Average Purchase Frequency (APF)
APF refers to the average number of purchases made by a consumer within a fixed amount of time. Higher APF values directly enhance the CLV of a business.
Customer Lifespan (CLS)
It’s the average period over which a customer keeps purchasing products from a business. CLS and Customer Lifetime Value are directly related.
Gross Margin (GM)
It refers to the percentage of profits made by a business. Higher gross margins leave you with a higher Customer Lifetime Value.
Customer Acquisition Cost (CAC)
The total amount of money you spend on marketing and sales to gain a single customer is called the CAC. The more you spend on acquiring new customers, the lower your Customer Lifetime Value.
Why Is CLV a Crucial Metric For Ecommerce Businesses?
Calculating your customer lifetime value is crucial if you want your business to grow. It can help you:
- Perform accurate revenue forecasts and financial planning
- Identify highly valuable customers, and personalize your marketing strategies to retain them without spending much money
- Lower your acquisition costs
- Make informed decisions related to product development, customer support, and overall business strategy
- Provide a more personalized customer experience.
Long story short, it helps you gain a significant competitive advantage over competitors. To be honest, we cannot possibly list all the benefits of calculating CLV in a single blog!
How to Increase Your Customer Lifetime Value?
There are numerous strategies to increase the customer lifetime value of an e-commerce store. So let's take a dig at the most important and effective ones.
Cross Selling and Upselling
Cross-selling and upselling to your current customers is an excellent strategy to get your sales up and running in no time.
Suppose someone bought a small size of moisturizer from your brand, you can upsell the bigger size product to them with a discount code. This is an excellent way to upsell and increase a customer's cart value because you already know that they need or want to buy this product!
When it comes to cross-selling, the best brand to learn from is the OG Amazon. If you buy a skincare product from a particular brand from Amazon, you'll start getting personalized product recommendations which will be similar to your previous purchase. Or maybe if you buy a book, they'll share other book recommendations in the same genre or by the same writer. This highly increases the chances of repeat purchases because the customer is getting a personalized experience which will make them feel more valued, increase their bond with the brand, and encourage them to buy the things they like!
Build a Social Media Community
Social media marketing and community building are the two buzzwords that are on every marketer's to-do list and for all the good reasons.
They're basically two sides of the same coin which can do wonders for your ecommerce store. To leverage this you need a strategy that can help you build a community on the social media platforms where your target audience hangs out. It can be Instagram, Facebook, X or Linked.
The best part? This will not only help increase your customer lifetime value but also increase your reach and consequently customer acquisition tremendously.
However, it's important to note that this is a time-consuming process and won't help you pinpoint your current customers and target them to increase your sales. To do that you need a solid loyalty program which we'll talk about next.
Loyalty Program
Loyalty programs give customers a unique sense of exclusivity and convenience. Introducing loyalty programs can help you increase variables such as APV and APF. Effective, and well-thought-out loyalty programs motivate customers to return to your business for more.
Here’s what you do: promote discounts and coupons for each customer, based on purchase values and referrals. Such benefits motivate customers to keep coming back for more!
Loyalty programs can also help promote new launches and achieve faster sales. Here are some tips to follow:
- Provide loyalty program members with early access to new products at discounted rates
- Incentivize higher sales by providing bonus points on purchasing new products when they’re launched
- Host member-exclusive events to enhance your customer experience, and give your marketing that extra little push
You can also mix a bit of affiliate marketing in there by incentivizing customers to refer you for more returns!
How to Launch a Loyalty Program?
With Rivo, you can establish a loyalty program to keep your customers coming back for more! You can choose any of the three programs:
1. The Points Program
You can set up the point program with Rivo, as it makes customers feel more valued, and encourages them to repeat transactions.
You can set it up by logging in and clicking “Points” under “Programs” on the left.
Once you turn on the toggle switch (as shown in the screen above), you can access a highly customizable menu of actions. Turn on the actions that feel best to you.
When customers perform any of the actions (Signing up, Placing orders, Social Actions, and many more), they’ll be rewarded with points!
You can even customize how customers can spend these points.
2. The Referrals Program
Under the “Referrals” section in “Programs”, you can turn on the toggle switch to enable a referral program for your business.
You can choose from two defaults to create rewards for “Referred Friend”, and “Advocate”.
Just click on “Add Reward” and make the appropriate selections in fields such as “Reward Title”. “Reward”, “Minimum Cart Requirement”, and “Apply To”.
You can even set an expiration date for these rewards! Isn't that amazing?
3. The VIP Program
You can set up the VIP Program to celebrate your most valuable customers.
Once you toggle the VIP Program Status button “ON”, you can set up different VIP Tiers, and set up their entry criteria, and expiration dates! Customize them as much as you need.
Make your best customers feel more exclusive! Shower them with deals that they cannot miss out on!
What are The KPIs to Identify if Your Loyalty Program is Increasing Your CLV?
Here are some KPIs that you must track after deploying a loyalty program to identify whether your loyalty program is working or not:
Customer Retention Rate (CRR)
Find out the number of customers at the end of the loyalty program (E), along with the number of customers before the loyalty program (S), and customers gained (N). Apply these values to this formula and find out your CRR:
CRR = (( E - N ) X 100) / S
If you want a detailed understanding of customer retention rate and ways to increase it, consider reading this our blog where we cover five of the most effective ways to increase customer retention rate.
Repeat Purchase Rate (RPR)
You can calculate RPR by applying the following formula:
RPR = ( Repeat Customers/Total Customers ) X 100
Remember, a higher RPR signifies a successful Loyalty Program. That said, other KPIs that can help you measure the effectiveness of a loyalty program include:
- Revenue earned from loyalty members
- Average Order Value
- Cost of running the loyalty program
Conclusion
Successfully calculating your CLV helps you make informed decisions regarding marketing and sales, and increase productivity. The data you’ve gathered during the process can also help you set up effective loyalty programs to further boost your Customer Lifetime Value.
You must ensure that the Loyalty Program you choose aligns with your business. But you can leave that to us. Let us help you figure out everything you need to know.
At Rivo, we help businesses set up effective Loyalty Programs that work! Get a demo today!
