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How to Calculate Customer Lifetime Value and Why It’s Important

Customer lifetime value, abbreviated as CLV, is one of eCommerce’s most critical business metrics. Aside from measuring the total amount of money they spend at your store; this metric can also be used to identify which customers are the most important, improve your sales funnel and increase customer loyalty.

If you want your business to succeed in the long run, you need to know how to calculate your customer lifetime value and how to increase it!

What is CLV? Customer Lifetime Value Definition

Customer Lifetime Value, also known as CLV, is one of the most critical eCommerce KPIs. When it comes to attracting and retaining customers, the latter is often much more cost-effective than the former. On average, the cost of acquiring a new customer can be five to 25 times more expensive than retaining an existing one.

Put simply; Customer Lifetime Value measures the total value or amount of money they’ll spend at your store. The higher the value, the higher the amount your customers spend at your store before they move elsewhere. Often, a company’s CLV is contrasted against its churn rate or retention rate or the percentage of customers who take their business elsewhere over a period of time.

If a business has a low CLV, it might mean that their customer retention and loyalty are lacking. On the other hand, a high CLV might not mean much if a customer’s average order value is high but measured over a shorter duration of time.

In other words, knowing how to calculate Customer Lifetime Value, while necessary, does not paint the whole picture.

Why is Customer Lifetime Value Important?

what is CLV

Understanding the CLV of your store is not only beneficial for your bottom line – but it can also guide your marketing and customer service efforts more effectively. Here are some reasons why knowing your CLV is essential.

Guides Marketing and Customer Service Strategies

If your product or service suffers from a low CLV, it could be a sign to look into your customer retention and service strategies. A company that consistently provides value, quality service, and support to its customers will easily retain them.

The customer experience of your store, your marketing efforts and how well you service your clients all affect the customer relationship. The value of a customer increases in parallel to the value a business can provide to them. Consider calculating CLV in your next marketing campaign to guide your efforts more effectively.

Identifies Your Target Audience

One possible explanation for a high customer churn rate is that your business is attracting the wrong audience. Calculating the lifetime value of your average customer won’t mean much if they’re not the right ones.

Leveraging heavy discounts and sales, in theory, is a great way to attract customers. In practice, doing so will build a customer base that’s likely to leave after they capitalize on the deal. You might attract many new customers using this strategy, but how likely are they to stay?

Increases Your Bottom Line

The higher your customer lifetime value, the higher your revenue. A returning customer is the best kind of customer. In addition to keeping your customer acquisitions costs low, retaining your customers can lead to more profit. One study argues that increasing your retention rate by 5% could lead to a 25% to 95% profit increase.

How to Calculate Customer Lifetime Value

To calculate the lifetime value of your customers, you need to identify a few other things about your business as a whole. To gain a comprehensive understanding, you’ll need to determine:

  • Customer Acquisition Cost – How much you spend to acquire customers.
  • Average Purchase Value – Average amount your customers make per order.
  • Average Customer Lifespan – Average duration of your customers’ relationship with your business.
  • Cost to Serve – Costs incurred with managing and fulfilling orders to existing customers

Using the above information, you can use the following formula to calculate your CLV.

(Customer revenue/year) x (number of years as a customer) – (Customer Acquisition Cost + Cost to Serve) = Customer Lifetime Value (LTV)

If you don’t have all this information handy, you can use this more straightforward customer lifetime value formula instead.

(Average Purchase Value x Average Number of Purchases) x (Average Customer Lifespan) = Customer LTV

The average purchase value or average order value compares the purchase frequency of your customers with how much they usually spend. This metric is generally calculated by dividing total revenue per segment of time over the total number of orders.

With so many different business, product and service types, it’s essential to adjust your CLV formula to fit your unique needs.

How to Increase Your Customer Lifetime Value (CLV)

Improving your Customer Lifetime Value increases your profit margins, lowers your acquisition costs and improves the entire relationship that your business has with its customers. Here are some quick and easy ways to improve your Customer Lifetime Value (CLV) on the cheap.

Focus on the Customer Experience

While providing a discount rate on your products and services is a great way to attract customers, it’s not ideal for retaining them. As we’ve mentioned above, providing a discount rate might end up attracting the wrong audience!

The easiest way to show that you value customers is to provide or improve customer support efforts. Focus on improving the store experience for an existing customer instead of attracting a new one. Engaging with them, following up with them regarding a recent purchase and offering special deals and gifts will increase the likelihood of staying for the long term.

An easy way to increase the customer experience is by offering same-day shipping. Customer expectations are high – 80% of shoppers already expect same-day delivery, with another 61% expecting their packages within 1-3 hours of placing their order.

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Offering affordable, quick and convenient same-day delivery through Cantec Couriers is guaranteed to satisfy your customer’s needs while also providing excellent value.

Reward Loyalty

If your clients stay with your company, rewarding them for their loyalty can let them know how much you care about them. Even providing something as simple as free shipping or gifts is enough to encourage many to stick with your eCommerce website for longer.

Additionally, customer loyalty programs such as a points or reward system can increase your gross margin while also keeping costs low on a per-customer basis. It’s a win-win situation for any company looking to reduce its customer churn

Provide Real Support

Addressing a customer’s questions and concerns quickly and effectively is guaranteed to increase your CLV without costing too much money or resources. Negative experiences create dissatisfied clients who will leave once they find a better alternative—as such, listening and responding to customer feedback is essential for a company to retain its clients.

Valuing Customer Lifetime Value

A customer’s lifetime value is an essential metric in the realm of eCommerce, but it’s far from the only one. Understanding how to leverage this metric to improve your engagement strategy and deliver more value to your customers is the real benefit of this KPI.

Providing your clients with convenient and cost-effective same-day delivery is the easiest way if you want to improve your margins without spending too many resources. The sooner they get your product, the sooner they’ll get to enjoy it. Convenience is value, and not enough companies are doing enough to deliver on both!

Sign up for Cantec Couriers today to make same-day delivery your competitive advantage and delight more clients!

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