When you’re in eCommerce, you want to develop long-term relationships with loyal customers. This is an important part of being ahead of your competition. It’s much more time-consuming and expensive to acquire new customers than it is to keep the ones you have. That’s where the term customer lifetime value comes into the equation.
Below are few things that every eCommerce business should know about customer lifetime value.
1. The Basics of CLV
Customer lifetime value or CLV is an important statistic to track as part of your larger customer experience program. CLV measures how valuable a customer is for your business not only on a purchase-by-purchase basis but throughout the entirety of the relationship.
Customer lifetime value is a critical metric to track because, as mentioned, it costs less to keep a current customer rather than trying to get a new one.
Increasing the value of your existing customers can drive growth.
To begin to understand what drives customer lifetime value, you need a good understanding of the customer experience, and you need to begin to measure feedback across touch-points.
2. Measuring Customer Lifetime Value
Calculating CLV can get tricky, but if you’re organized and know what data to look at, it’s possible.
To begin to measure CLV, you should identify touch-points where your customer is creating value.
You can then integrate your records, creating a customer journey. At each touch-point, measure revenue. Then, add it together for the lifetime of a customer.
Remember, you can’t improve what you aren’t measuring. When you know what you’re earning from a customer, you can increase or decrease your spending to help maximize profitability, and CLV forecasts help with forward-looking decision-making so that you aren’t over- or under-spending.
Another way you can measure your customer lifetime value is to first start by determining your average order value. You can then calculate your average number of transactions a week.
Measure your customer retention, and then you can multiply the three together to get your CLV.
3. The Importance of CLV
We’ve touched on some of the general ways CLV is important, but there are others. CLV is core to a financially stable business that can grow in a sustainable, organic way. CLV is long-term, and the benefits repeat. It’s a lot different than only looking at short-term sales.
Your customer lifetime value affects your profitability. If you’re only working on conversions from new customers, you’re paying the cost of acquisition each time, meaning each sale has a smaller margin.
If you optimize for CLV, you’re getting repeat orders from customers, so you aren’t paying for them every time.
You can get the full profit margin of all of your orders after your initial one, so your ROI goes up.
Repeat orders can also help you generate a healthy cash flow. You can project it more easily and keep up with payments when you know money is coming in.
CLV helps you acquire more of your target customers. You can spend more on reaching the ideal target group because you know who’s most likely to turn into a loyal customer.
When you have bigger margins, you can reinvest more into growing your business.
Having a high CLV also shows that people are happy with your brand, products, and service. This helps you know what you need to do to keep growing based on this initial sense of satisfaction.
4. Maximizing CLV
Numerous methods exist to maximize your customer lifetime value, including:
- Customer retention, at its core, is about adding value for your customers. That means that you want to help them in other ways, aside from just providing your product or service. Focus on marketing and content that’s inspirational and educational or solves a problem for your customers. You don’t want to use your marketing only as a way to sell directly. In fact, that should be a very small part of it overall.
- Make it easy for your customer to exchange or return items when they need to. Of course, you want to do things to reduce the number of returns you get, like ensuring product descriptions are accurate, as are photos. Even when you do everything you can, you’ll have some uncontrollable returns, so make your policy transparent and easy to find. Make it simple for your customers.
- Simplify your purchase experience and reduce friction. Use A/B testing to figure out what works ideally here.
Finally, improve your customer service. When you have poor customer service, your CLV is going to decline quickly, and your customers will go with your competitors. Make sure that each interaction is a positive one for better loyalty.