[Psst, before you read this: Make sure your Google Analytics account is configured properly! Otherwise, you won’t be able to rely on any of your data. Grab your free Google Analytics Audit Checklist here.]
Customer lifetime value & why it’s so important
Customer lifetime value (CLV for short) is a metric that you can use to predict how much a given visitor contributes to the goal of your website. Put another way, CLV helps you know how much revenue to expect from a visitor who converts.
CLV can be calculated relatively quickly using a few easily obtainable figures. You’ll need:
- Total revenue (or other metric that makes sense for your website) for a given period
- The length of that period
- The total number of customers during that period
This simple formula gives you the expected value of each customer.
Obviously, knowing your average CLV gives you a strategic advantage. For example, use your average CLV to estimate how much of your marketing budget you can spend to acquire a customer.
You can also use CLV to estimate the success of your deals and offers. And you can even use it as a metric for your A/B testing (by measuring and/or aiming to increase your average CLV).
Measure CLV with Google Analytics’ Enhanced Ecommerce features
Depending on your website’s function, you can measure different aspects of the lifetime value of your visitors. You might be interested in page views per visitor, or session duration, as success metrics.
However, most ecommerce websites are interested in growing revenue per user, since that’s their ultimate KPI.
Accurately measuring customer lifetime value in terms of revenue requires you to enable Google Analytics’ Enhanced Ecommerce features. Only then can your analytics track and record your site’s revenue and transactions made by individual customers.
Without Enhanced Ecommerce, you’ll only be able to track non-monetary values, like page views, goals, and sessions.
Google Analytics’ Lifetime Value report consists of two parts: a chart and a sheet.
Both play their part in providing information about your visitors. We’ll go through these two components one by one.
How to read and modify the LTV chart using different metrics
This chart offers multiple ways to modify the information displayed, and analyze different aspects of your visitors’ behavior.
The “LTV metric” will be your primary way to modify the data you see on the chart. (Note that this feature is still in beta, so Google can make additions to all the metrics selectable in the drop-down menu here.)
By clicking a plus sign on the right-hand side of the “LTV metric” drop-down menu, you can select another metric to compare it with.
LTV metric #1: Goal Completions Per User
Depending on what you want to track, a goal might be defined as viewing a particular page, or taking a certain action on the website. If you select the “goal completions per user” metric, the chart will display the number of completed goals per visitor.
Whatever you choose to track as a goal, make sure it’s a goal that works towards the objective you want, and has a positive overall impact on your website.
LTV metric #2: Pageviews Per User
The “pageviews per user” metric is another way of tracking and conceiving of lifetime value. Its usefulness depends on what your website is designed to achieve.
If you care how many pages of your website a visitor has seen, use this metric. For example, if you have a blog or similar resource, you may want to know how many pages visitors read.
LTV metric #3: Revenue Per User
All of the prior metrics mentioned will function perfectly and provide data without any additional Analytics configuration.
As mentioned before, though, the “revenue per user” metric will only provide data if you configure Ecommerce features in your Google Analytics account. These features enable Analytics to collect revenue and transaction data and report these directly to the Ecommerce Reports function.
When Ecommerce features are enabled, the Revenue Per User data will automatically be available in the Customer Value report.
The revenue metric’s main advantage is that it helps make a direct connection between other metrics and your website income. Because of this, it can serve multiple purposes — estimating the financial success and viability of your website, the effectiveness of individual traffic sources, and so on.
LTV metric #4: Session Duration Per User
Session duration per user allows you to estimate how long the average user engages with your website.
For example, much research has established that engaged visitors convert better — so if your session duration metric is rising, it means your visitors are more engaged and thus more likely to convert.
Additionally, if your website contains video or other content with a known duration, the session duration metric per visitor allows you to estimate the success of that content.
LTV metric #5: Sessions Per User
Another metric closely related to session duration is number of sessions per user.
If your website depends on multiple visits by the same user, this is the indicator you need to track. A growing number of visits per visitor indicates that your content is interesting in the long term, and that visitors frequently return to check for new content.
You can also use this indicator to estimate the purchase cycle of your customers by correlating it with other indicators available in Analytics, such as the Time to Transaction report that shows “Sessions to Transaction”.
It’s possible your customers need to do more research before purchasing from you, so they make multiple visits. Your aim is to reduce the number of sessions the average customer needs before they perform a transaction.
In the example above, most customers made their transaction in 1 or 2 sessions. Obviously, the ideal number of sessions per customer should be 1, or (at least) equal to the actual number of visitors. If this indicator is lower than one, so you have fewer sessions than visitors, it may mean that you have a problem with spam.
LTV metric #6: Transactions Per User
Another good indicator of the value of an individual customer is the number of transactions per visitor. Of course, this indicator will closely match the conversion rate of your website.
Use the Customer Value sheet to inform your marketing spend
At the bottom of the CV report in Google Analytics, you’ll find a sheet with multiple rows. Depending on the metric you select, these numbers will change, and you’ll see information that can lead to very interesting insights.
This sheet contains the breakdown of all acquisition channels, and metric values for each. For example, in the above sheet, we used the “revenue per visitor” metric.
When broken down by channel, it appears that referrals brought the most revenue to the website. Visitors who reached the website by referrals spent $1.8 million on the site during the period observed. The revenue per visitor who arrived to the site via referrals was $35.
This means that referrals are the single most effective source of traffic for this website (the Google Merchandise Store, in case you’re wondering).
Of course, we could have gotten this data from other sources, such as the Multi-Channel Funnels report. The advantage of this report over that one is contained in the third column of this report.
The “Revenue Per User” column gives an indicator of the overall revenue each visitor contributes. Here, every visitor is worth $5.60.
The rows below show the revenue that visitors from each channel brought in. For referral, the most effective channel, this value is $35.01. That means you could invest as much as $35 to acquire additional visitors through referral and have a minimum positive ROI.
Using this sheet with the “Revenue Per User” metric makes it easy to adjust your marketing spend. For example, for this site, spending up to $2.50 on paid search yields a positive ROI.
But the usefulness of this report doesn’t stop there. The information in this sheet can be modified further for more valuable insights.
If you run multiple advertising campaigns using PPC, for example, you can use the dropdown menu at the top of the sheet to change the main criteria:
Here, you can view not only acquisition channels, but individual sources and mediums, as well as your individual PPC campaigns.
Using these criteria, you can determine which campaign is the most effective and increase your investment there, or adjust the spend to reflect the value of each new visitor acquired. (You can also see which campaigns are the least effective, and adjust your spend or kill the campaign accordingly.)
You can also check which source or medium results in the most revenue (or another indicator).
Which metric should you use?
As we’ve seen, there are many metrics in Google Analytics’ Customer Value reports, and all of them can be used to gain insight into your website’s performance.
As with every other report and metric in Google Analytics, the objective of your website will determine which metric or metrics are the most important to you. In general, though, ecommerce websites will mostly be interested in revenue and transaction metrics.
Eventually, no matter how long a visitor spends on your website, how many times they visit, or how many pages they see, what matters the most is how much money they spend on your website. Therefore, revenue per user and number of transactions per user should be the most important metrics to consider.
Just another reminder that in order to have revenue and transaction metrics at your disposal, you’ll need to make sure your Google Analytics account has Ecommerce or (better yet) Enhanced Ecommerce features enabled. Otherwise, this report will be empty, since Analytics won’t have data to calculate with.
All the other metrics, such as session duration, number of sessions per user, goals completed per user, and so on can be considered supplementary to the main objective: making more money.
Don’t forget that you should use this report to complement other available reports, like Acquisition reports, Ecommerce reports, and Attribution reports. Only by collating all of the data can you be sure that you’re not ascribing causation to correlation.