If you run any kind of business, you’ll agree with me that the hunger for more is one of the key factors that add value to your business. This is especially visible in the eCommerce niche. If you run an eCommerce business you’ll be faced with the challenges of making decisions that could either make or break your business.
One of these challenges is also how to make your customers more loyal and how to increase customer lifetime value. But, that doesn’t change the fact that for every business, customers are gained and lost over time.
As you may already know, it is often said that the cost of getting a customer is higher than keeping one, but is this always true for every customer? To answer this question perfectly, you must know your customer lifetime value (CLV) as it will help you;
- Know how much to spend in acquiring a customer with a profitable relationship
- Understand the type of products needed by customers with high customer lifetime value
- Know the products with a good profit margin
- Know the type of clients that will generate more profit for you.
Knowing how to calculate your CLV will enable you to determine these factors and then help you in making the right decision that will boost your eCommerce business.
What is Customer Lifetime Value?
Also referred to as lifetime value (LTV) customer lifetime value is the profit margin you expect to make from an average customer over the business lifetime. It represents the sum amount of money you expect a customer to spend in your business over their lifetime.
As an eCommerce merchant, the customer lifetime value is an important metric to watch out for in your business. Calculating it will help you determine the worth of each customer you have in your eCommerce store in the long run. And knowing this will help you know the right amount of money and time to spend in acquiring more customers as well as retaining each customer you already have while maintaining your profit margins and staying within budget.
For example, if the average CLV of a customer on your web store is $2000 and you spend over $2000 to get new customers, then you’re losing money! You must go back to the drawing table to discover new ways to get new customers at a much lower rate if your business must continue to thrive.
How to Calculate Customer Lifetime Value?
I’m sure you know by now how important it is to calculate your customer lifetime value. A lot of business owners and companies as well try to evade or neglect this calculation citing inadequate systems, untargeted marketing and segregated teams as challenges for doing so; however, that doesn’t make it right.
Given the fact that a slight increase of 5% in customer retention rate can increase your profits by 25% – 95%, knowing your customer lifetime value is very important.
Lifetime Value = Average Value of Sale x Retention Time Period x Number of transactions
To get the customer lifetime value, you will need to calculate with consideration of the operating expenses, unlike the lifetime value which is calculated only in revenue terms.
Customer Lifetime Value = Average Value of Sale x Retention Time Period x Number of Transactions x Profit Margin
To make things clearer, if the average sale of on your show merchant site is $500 with an average customer buying 3 pairs yearly and have done so for 2 years, the lifetime value of the customer would be;
$500 x 3 x 2 = $3000
However, putting into consideration, the operating expenses, if your profit margin is 20%, the customer lifetime value will be;
= $500 x 3 x 2 x 20%
= $300 x 20% = %60
Calculating your customer lifetime value could be discouraging; however, it’s worth doing considering its benefits. As a business owner with the goal to grow your business, you’ll need to work on ways to increase your customer lifetime value. This means you have to find ways to improve your operational efficiencies and also impress your customers using well-targeted and personalized communication with them.
Make your first impression positive by optimizing your onboarding so that customers will understand the features of your product and how it can impact their lives thereby convincing them to buy. Create loyalty programs like discounts to keep your customers coming back to buy more and retarget your previous customers so they get to come back after the first buy.
Picture 1: Infographic of how to calculate CLV
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