When businesses think about customers, they would often link them to transactions and revenue. Consumers purchasing trends and patterns are often what companies focus on the most. However, simply valuing consumers over the short term isn’t enough to make a high profit for businesses. Here is how consumer lifetime value plays a crucial role in benefiting companies in the long term. Rather than thinking about how to acquire more customers while lowering costs, consumer lifetime value helps you to optimize your long-term acquisition spending for maximum value.
Let’s discover in this essential guide:
- What is Consumer Lifetime Value?
- How to Calculate Consumer Lifetime Value
- Why is Lifetime Value important in eCommerce
- Strategies to increase Lifetime Value
- Examples of retention campaigns in eCommerce
What is Consumer Lifetime Value?
Lifetime Value is an estimate of the average revenue that a customer will generate throughout their lifespan as a customer. Consumer lifetime value (CLV) is one of the most important statistics to track consumer experience programs. CLV is a metric of how valuable a customer is to your business, not just on a purchase-by-purchase basis but across the whole relationship. Understanding CLV will help your business to develop strategies to acquire new customers while retaining existing ones and maintaining profitability. It keeps costs lower to keep existing customers than acquiring new ones, and drives growth by increasing the value of your existing consumers.
How to Calculate Consumer Lifetime Value
To calculate CLV, you need to first know the following segments:
- Average Purchase Value, which is the average value of consumer transactions
- Average Gross Margin, which tells you what part of consumer purchase is profit and what part is cost. It can be calculated with this formula: Gross Margin = (Total Revenue – Cost of Goods Sold) ÷ (Total Revenue)
- Purchase Frequency is the average number of transactions that a consumer makes in a given period. You can calculate this by dividing the average number of purchases by the average number of customers.
- Customer Lifespan, which is the length of the customer relationship. The calculation of customer lifespan may vary for different types of businesses.
- Customer Acquisition Cost, also called CAC, which is the average amount you spend on acquiring a customer. Such as marketing and advertising costs, and even sign-up incentives.
After calculating and knowing all the segments above, you should be able to calculate customer lifetime value easily by using this equation:
CLV = (Average Purchase Value x Gross Margin x Purchase Frequency x Customer Lifespan) – CAC.
Of course, there are other formulas and methods to calculate customer lifetime value, but the method above is one of the most popular ones.
Why is Lifetime Value important in eCommerce
Consumer Lifetime Value is the core of eCommerce businesses since it supports businesses to grow organically and sustainably by helping companies to generate better ROI and unit economics. There are a few areas in that Lifetime Value plays a major role in helping your companies grow.
First of all, customer lifetime value impacts your company’s profitability. Optimizing CLV will help you to maximize your value from existing customers and repeat orders so that you won’t need to pay for them again. It leaves you the full profit margin to acquire new customers and first-time purchases so that it would cover the costs of CAC, and further increase your ROI. Secondly, CLV ensures steady cash flows for your business, since obtaining repeating orders from existing customers benefits from generating a healthy cash flow regularly. So, you don’t have to be frustrated about not having enough money to keep up with your upcoming payments. Third, CLV helps you to reach your target customers. As you are already saving money with the CLV optimization strategy, you will have more budget to spend on reaching your target market and allocating larger amounts to spend on acquiring targeted customers. Even if you fail to acquire new customers, the power of your loyal consumers brought by your CLV plan will strengthen your brand and still earn high customer lifetime value. What’s more, CLV supports your businesses to grow with a bigger margin, which benefits you to invest more in growing your company and brand. For example, developing new products, hiring high-valued employees, and even expanding your business locations. There are various strategies you can use and invest in to make higher revenue.
Besides the areas above, consumer relationship marketing is growing rapidly in 2022. Customer retention contributes to more revenue than customer acquisition. As consumers tend to stick with the brand and products that they already know, they would be less likely to risk trying new products that they know very little about. This is why returning customers would be more likely to help your brand increase revenue. As already mentioned above, CLV ensures you maximize your value with existing customers to create high customer loyalty and retention, which explains better why CLV is important for your eCommerce business.
Strategies to increase Lifetime Value
As we know that the longer customers stay with your business, the greater the value they would provide to you during your lifetime relationship. Customer satisfaction and retention are the two main areas to focus on, to increase Lifetime Value. And here are some effective ways to help you increase lifetime value.
1. Utilize Cross-Selling and Upselling
While cross-selling means encouraging customers to buy complementary items, and upselling is inviting customers to purchase a comparable higher-end product. Both cross-selling and upselling will provide better solutions to your customers while increasing customer lifetime value through greater average order value and purchase frequency. Giving customers better options for a complementary product or service with higher prices and more benefits will potentially support you to increase your revenue. A lot of online businesses use cross-selling and upselling strategies like contextual targeting to ensure customers are getting the right products to fit their needs.
2. Offering a Referral Program
Referral programs are essential techniques to increase customer lifetime value while lowering your costs. Word of mouth is usually one of the most powerful strategies in marketing since consumers are more likely to trust recommendations of products from someone they know. This also means that consumers will be more likely to purchase the products or services from referred customers. It is also an effective way to increase exposure to new customers and possibly turn them into loyal customers.
3. Enhancing customer service
Quality customer services will provide a better customer experience, which further helps increase customer retention and CLV. As we know that customer retention is one of the five pillars of eCommerce, and it will increase your eCommerce business’ profitability by turning your customers into repeat customers. If your customer service is below average, you might lose your customers from switching to competitors’ companies. According to research, consumers are likely to switch brands if they experienced bad customer service. That’s why it’s crucial to provide your customers with quality customer service. It will also increase the possibility of turning your existing customers into loyal customers.
Customer service quality is pivotal during the shipping phase: don’t make the mistake of abandoning the customers while they are expecting their delivery. The recipient can experience problems like delays, failed delivery attempts or something else; anyway, they’re eager for updates about the shipments’ tracking and desire a proactive support directly from the store they buy from. With Qapla’ you can connect your shop to all the couriers and set a marketing automation flow up to notify customers about thier shipments via email, SMS or WhatsApp in real time. Raising the standard of the delivery experience impacts, as well, on retention and lifetime value.
4. Improving onboarding processes
This is an efficient way to increase customer retention while ensuring your customers are engaging with your product and services. You can improve customer onboarding processes by creating a sequence email that includes the information your customers need to get the best value from your product. This means that email marketing plays a major role in adding value to your products and customers. Consumers will also prefer something that is personalized to them while meeting their needs. Incorporating email marketing software is extremely useful to assist you in customizing your emails to consumers while saving you time. In addition, when people purchase the products from you, they would expect the products to be delivered as soon as possible, by tailoring your customers’ requirements and increasing the delivery time will help you increase CLV rapidly. Make sure your onboarding process is easy and understandable for your customers while encouraging them to engage with your products in their next move.
5. Creating engaging content
Content marketing is another essential tool to help you build closer relationships with your customers while making them more engaged with your brand. Make sure the content that you create is focusing on what your customers want, it can be either a common pain point of your targeted customers or educating content that they need. As long as you develop the relationship with your customers, it will not only increase CLV, but your customer will also likely to help you promote your brand through word-of-mouth. The better your content helps customers connect with your brand, the higher CLV you will establish with them, as well as, the better outcomes you will get back from your loyal customers.
Examples of retention campaigns in eCommerce
Customer retention means your product and service are meeting customer expectations even after their first purchase. And it’s obvious that the higher your retention rate, the more repeat purchases, and ultimately, the higher customer lifetime values. It’s important to know your customers’ needs and what they value most about your brand, as well as tailor your retention strategies to their preferences.
- CBDistillery: Lean into content-led commerce
Content marketing helps customers to purchase more of your products while creating an emotional connection with your brand. It will support you to establish stronger relationships with retaining customers. CBDistillery uses ebook and podcast content marketing strategies to build relationships and bond with their loyal customers who consider CBD as a key part of their healthy life.
- Yankee Candle: Apply a subscription experience
Subscriptions increase customer retention by shipping customers the product they want every constant period with a reduced price. It provides consumers with the benefits of both cost-saving and convenience. Yankee Candle implemented a subscription plan to retain the customers who are buying their brand’s products from other merchants. Their subscription strategy helped them to successfully increase the retention rate of subscribers to 90%.
- KIND Snacks: Offer creative incentives to customers
Customers love incentives and it also encourages them to buy more of the products. Incentives both increase customer retention and acquisition. KIND Snacks provide creative incentives to make customers who bought once become a subscriber of their brand. They offer free shipping on all orders that are greater than $40, with more incentives to subscribers to enjoy 50% off every fourth order and free samples. KIND’s combination of incentives strategy supported them to grow their subscriber base by 50%.
Investor, founder and CEO @ Adspace. He has +15 years of Experience in digital marketing and consulted over 200 eCommerce brands, generating over $1 Billion in total revenue.