What is customer lifetime value (CLV), and why is it so important?
CLV is a predictive metric that attempts to estimate the amount of revenue a single customer contributes to an ecommerce (or other revenue-generating) website during the course of that customer’s relationship with the website.
It’s used to guide stores’ efforts in customer and traffic acquisition by showing how much an additional customer is worth in concrete financial terms. When you know how much a customer is worth, it sheds new light on the process of acquisition — and can reveal when acquisition is simply too expensive to be sustainable.
Generally, acquisition accounts for a cost per visitor for each channel. CLV enables you to add an additional criterion to this calculation: the actual ROI of that channel. Knowing how much each additional customer contributes to the gross revenue and net profit of your store, you can assign more value to particular channels and justify a higher acquisition expenditure in some cases.
CLV can also predict your site’s future cash flow, so you can estimate its value to you and other stakeholders. This is especially helpful when looking for new capital investments to expand the business.
How to calculate your most useful CLV
Measuring CLV is a simple exercise: take your average order value, multiply it by number of transactions, multiply that by the number of customers and the time period for which you’re calculating.
Then, multiply the resulting number by your average gross margin. The end figure shows the share in profit that can be attributed to a single customer.
The formula above discounts the future value of the CLV to its present value, accounting for time value of money. When you calculate the CLV for past periods, you can omit this part.
While the math itself is rather basic, there are a few intricacies that, when applied, can make your CLV data so much more useful. For example, by segmenting customers, you can derive different CLVs that will show you how much each segment of your customers actually contributes to your website.
As you can see from this example, this report is segmented in the most useful manner: by acquisition channels. That way, you can quickly discover which channel is most effective, and act appropriately.
In our example above, the Referral channel brings in the best customers with the highest average CLV. Since the referral channel has such a good performance, it means that this channel should be treated preferentially when we consider further increases to the acquisition budget.
However, there is a definite point where the law of diminishing returns kicks in and ROI starts dropping. Before this happens, in order to increase the likelihood that your CLV won’t drop too, you should start researching the customers who reach your website through the best-performing channel. For more on CLV reports in Google Analytics read our in-depth post.
Segment them. Observe their behavior and try to find out more about them. The primary aim of this research is to discover alternative acquisition channels for these customers. By acquiring them through alternative channels and at a lower cost, you can further improve your ROI.
That’s not to say the cost of acquisition is the sole metric you need to consider. The idea is to regard each customer as an asset for your website. Assets, in addition to their acquisition cost, require maintenance to continue providing benefits.
All the effort and investment you put into a customer from acquisition on should build toward a singular purpose: increasing that customer’s value of the customer and setting the stage for future benefits.
Before you sell…
Of course, before you can even think about selling to customers, you must ensure the product you offer is attractive enough. By that, we mean that the products you offer are high-quality, your website is attractive and easy to use, and your product copy is convincing.
These conditions should be your first priority. Only products that solve problems for customers and give them tangible benefits can ensure the long-term survival of your store. Once you’re secure in what you sell, you can start thinking about improving customer lifetime value.
As we’ve covered, getting someone to buy again is much easier than getting a new buyer, not to mention that repeat customers tend to spend more. And once you’ve got those repeat customers, you need to develop a well-thought-out strategy for increasing CLV.
Below are some ways we’ve been helping our clients grow their CLV. They might serve your ecommerce store well, too.
Improve CLV at every point in the purchase funnel
It’s about much more than conversion
Let’s get one thing out of the way: if you focus solely on improving conversion, and spend all of your effort just to get a customer to buy, it’s like having a one-night stand with that customer.
While one-night stands can be nice for both parties, what you’re really looking for is a stable relationship that will last. However, to turn a one-night stand into a relationship, constant effort is required — and the same is true of that first customer conversion.
The entire pre-and-post conversion process can be neatly summed up by the following image:
Even though it’s easier to get a once-converted customer to return to purchase more, don’t assume you can stop communicating with that customer.
After all, you probably know what they like, where they come from, to which marketing channel you can attribute their conversion, and what content or combination of content caused them to convert… and that’s valuable knowledge that you need to put to use.
Get in touch right after the purchase
The best practice immediately following a customer purchase is something that should go without saying, but just in case, we’ll say it:
You need to ensure that a customer who purchased a product receives it in the form they saw it on the website, on time, and undamaged. Only when you ensure the customer is completely satisfied with your service the first time around will you have a chance at a repeat purchase.
If a slip-up happens and the customer receives a faulty delivery, you should make every effort to limit the damage. Offer a replacement product or refund, provide free return or exchange shipping — whatever makes the customer happy and doesn’t destroy your bottom line. The way you handle customer-facing problems is critical because it can influence the entire image of your company.
Although there are people who will complain about everything, always treat every complaint with respect. HelpScout has this advice for dealing with customers who are truly lost causes:
“Winning customers back with exceptional service is fundamental, but when people already have one foot out the door, you’re better off letting the parting be as frictionless as possible. Learn what you can, see if there is a way to resolve the issue, and accept the outcome if there isn’t.”
Remember that the absence of a complaint is not necessarily a sign that all is good. The second step is communicating directly with the customer. Send them a thank-you email, and try to make it feel personal, using what you know about that customer.
Your thank-you note can also contain product placement, especially upsell and cross-sell options for the product they just bought. If the product requires a resupply or a refill (for example, printer ink cartridges or batteries), offer those too.
MarketingLand points out that in fact, there are many ripe opportunities in post-purchase emails:
“Smart businesses know the powerful opportunity presented by emails sent to buyers after they’ve completed a transaction — from the order confirmation to processing status updates and the shipping notification.”
Streamline your registration process
Inviting customers to opt-in, register, or create a membership with your store increases the potential for future engagement. You can entice customers to register by offering various benefits, such as discounts, free shipping on higher-value purchases, or loyalty programs (we will tackle those in detail later on).
Plus, registering customers means you have a way to identify them, track their activities, and better personalize your store’s interactions with them. Creating a custom registration process is largely unnecessary, since most social networks enable you to use customers’ identities on those networks to log into your website. These “social logins” may not offer all the advantages of creating your store’s own managed accounts, but they reduce friction for customers and enable hassle-free login — both of which are good news for conversion.
ConversionXL points out that social login can also facilitate better retargeting:
“Social login in combination with social ad solutions like Facebook custom audiences, Facebook Retargeting & Interest targeting allow you to deliver more personalized experiences over the social networks.”
Even though using a social login removes your ability to track customer behavior more directly, it’s still much better than not knowing who customers are at all. And once you offer a social login option, you can then use social networks to target similar users and send them relevant offers and content.
Build truly valuable loyalty program
Once a customer becomes a registered user, you can engage them further. One method long recognized and used (which hasn’t lost any of its effectiveness) is the “loyalty program”.
Loyalty programs come in many forms, but their underlying basis is the same. Each time a customer converts, they receive a token of some kind. After accumulating tokens over a period of time, customers can use them to receive benefits.
Nordstrom’s loyalty program is a good example. In addition to regular points that customers can collect by buying, Nordstrom offers bonuses on certain days. See the “Earn Triple Points” banner on the store’s site below:
Another shop that began featuring a loyalty program and saw a twofold increase in conversions is Nancy’s Floral. They introduced a program that rewards customers with points that can be used as credit for their future orders.
Other loyalty programs are based on different achievements or milestones, like number of total orders, or different types of products bought. Some of them are not tied to the purchase process at all, but rather to entice customers to provide reviews. The best example of this style of loyalty program is Amazon, which sends customers an email asking for a review of the item(s) they purchased.
Once a customer writes a review, Amazon keeps track of the number of times that review is read. It also allows other customers to rate reviews for helpfulness. This rating provides customers who review products with a sense of achievement; meanwhile, Amazon derives valuable information about the product and can display ample social proof for other prospects.
Consider creating a community around your products
Community-based selling is another way to engage customers post-purchase. By making visitors feel like a part of a like-minded group of people, and offering them a place to converse, you can increase engagement with your website.
Members of a community generally share the same values and can help shepherd others toward more purchases. Besides, communities make for great opportunities to communicate with the customers and prospects.
By creating a community, Beardbrand gained ideas for blog posts on beard grooming, reviews and opinions of their products, and other content interesting to their current and potential customers. Their community spans social networks like Instagram, Twitter, and Facebook, and helps spread the word to other prospects looking for beard care products.
A community like this can help new prospects connect with existing customers and find out more about possible solutions to their problems. The presence of both a prospect’s peers and experts from your company can ease their search for solutions, and help your website be seen clearly as providing the best solution.
Additionally, customers who become part of a community tend to develop feelings of personal achievement, especially if they establish themselves as trusted and helpful members. This provides additional incentive for customers to stay engaged, and both prolongs the relationship between your store and customer and increases their average spend and CLV.
Creating a community is the perfect idea for stores that sell niche or specific products that appeal to a relatively limited group of people. Your community can become a gathering spot where they share their joint interests.
Optimize your upsells and cross-sells
Upselling and cross-selling is a way to engage customers post-purchase by offering them items that upgrade the functionality of, or complement, the item they just bought.
These marketing approaches help your store make use of the customer’s existing momentum and motivation to entice them to spend more. Often, upsell and cross-sell offers are made at a lowered price or with other special benefits.
The best examples of upsell and cross-sell offers can be seen at stores that sell electronics, like computers, TVs, and mobile phones. For example, if you buy a laptop online, you’ll enter a process of configuring the device. During that process, the store may try to sell you upgrades to the memory, hard disk drive or processor. Once you complete the configuration and purchase your item, you may be offered complimentary items such as backpacks, software packages, or other items.
For example, Best Buy below offers an upsell in the form of an additional warranty, a backpack, a mouse, or a printer. The customer can also choose to buy an external DVD drive, since the device does not include one.
Optimizing your upsell and cross-sell offers means hitting the right balance between the additional increase in price and the promised increase in functionality of the product your customers are buying.
Notice how Best Buy above offers an external DVD drive for just under $40, or a Microsoft Office software package for half the price a customer would otherwise pay for it. Offering these items at the moment when the customer is buying a big-ticket item like a laptop increases the likelihood that the customer will say “Why not?”, buy those additional items, and increase their average order value.
Upsell and cross-sell opportunities need not end at the moment of purchase, as you might remember from our discussion of post-purchase emails above. For example, a software company might send an email offering an upgrade (at a lower price than normal) to the piece of software a customer owns.
This strategy is frequently applied to registered users, as knowing which customers respond to which offers allows stores to gather additional data to inform their marketing efforts.
Get started with the right data
Optimizing to increase your CLV is the best way to ensure your ecommerce store’s constant growth. It means that not only can you rely on existing customers to contribute more of your store’s revenue, but you can effectively market to a wide segment of similar prospects by knowing what your existing customers like and prefer.
While CLV is a predictive metric, you can use it as a good indicator of how much an actual customer will spend. By segmenting and matching customers, this metric gets greater accuracy and reliability.
Even if you are just starting your business, beginning to track visitors and estimate your CLV is vital. While an average CLV can be hard to calculate if you have no customers or a very small pool of them, you can still derive useful knowledge from the way they interact with the site.
To get started, structure your goals using analytical tools like Google Analytics and its goals and funnels function.