What is customer lifetime value?

There are many e-commerce metrics that you must track, such as refund rate, conversion rate, average order value, and more. But what if you could track your ecommerce store’s success and your revenue with a straightforward metric?

You could do precisely that with average lifetime customer value. It saves you time by giving you the average amount you earn from each customer for their lifetime, which usually lasts 12-24 months. With customer lifetime value, you can understand whether your customers keep coming back to your store and the effectiveness of your retargeting efforts.

There are two main ways to calculate the customer lifetime value:

  1. Historic
  2. Predictive

Historic CLV is a straightforward metric that calculates all the customer’s transactions, acquisition cost, and production cost of the store’s goods.

Predictive CLV is a little bit detailed calculation, but generally, it’s more reliable. It uses the previous transactions of each customer alongside some behavioral patterns. As you get to know your customers’ behavior well over time, it gets even more reliable.
Essentially, customer lifetime value is how much each customer brings to your business throughout their entire lifetime with your brand. It takes into account every cost related to your product and customer acquisition.

Why Does It Matter For E-Commerce

Although CLV has been popular among SaaS businesses for a long time, it has also been an integral metric for e-commerce businesses in recent years.

As an e-commerce business owner, the most critical aspect is profitability. As CLV takes every cost of acquiring the customer and products’ cost to your business, it’s an extremely valuable metric that each and every team should focus on.

The marketing team should use CLV to determine their ad budget. The sales team should use CLV to focus on the customers who have high CVs to upsell to them and increase the revenue with less effort.

CLV allows you to increase revenue much faster as the probability of selling to a returning customer is 67% more than first-time visitors because they already trust your brand.

Investing in returning customers and focusing on retaining first-time visitors with various strategies, such as email marketing, discounts, and retargeting, can drastically increase your store’s revenue.

How to Maximize Customer Lifetime Value

The crucial part of increasing your CLV is to make first-time visitors and buyers returning customers via marketing.

As customers see your brand a few times online, make their first purchase with satisfaction, love your brand, and come back to buy more, they will turn into loyal customers over time.

As having loyal customers will take time, you can focus on your marketing to speed up the process. Your e-commerce website, sales process, and marketing should be focused on retaining customers over time.

Campaigns that focus on repeat purchases are perfect to increase CLV as customers who have bought twice from your brand are much more likely to make the third, fourth, and fifth purchases.

Thus, rather than trying to sell a more expensive thing to a first-time customer, it’s much better to focus on retaining them over time. But in the meantime, you should not ignore increasing their average order value.

To increase repeat purchases, you can offer discounts and free shipping to first-time customers. More importantly, you can email them with products related to the product they purchased. The more they return, the more your CLV increases.

Conclusion

Customer lifetime value is a critical metric for each and every e-commerce business as its sole focus is on retaining more customers and increasing their lifetime value.

It takes every cost into account so that teams can focus on it more confidently. Optimizing Marketing and sales focus to maximize the customer lifetime value is a great strategy to improve your brand loyalty, retaining more customers, and growing your business.