The goal of the CLV is to take into account your customers’ loyalty and retention to calculate the turnover (or profit) that a customer will generate during his or her “life” on your site.
The customer lifetime value is essential since it allows us to predict our turnover over the long term and to adjust our marketing or acquisition budget in consequence.
If you thought that the cost of acquisition was calculated based on a single hypothetical purchase, here is some data that will surely make you change your mind.
How do you calculate your customer lifetime value?
There are several formulas for calculating the LTV. However, many of them are complicated and time consuming to put in place.
There is a simpler way to calculate your LTV.
For this, you will need some bits of data from your business:
- The average cart
- Purchase frequency
- The customer value
- The average customer lifespan
To make your calculations easier, use the above indicators over the same period of time: 1 year, preferably.
(1) Average cart
The average cart is just turnover divided by the number of orders. It’s the average value of a purchase on your site.
Average cart = Turnover / Number of orders
(2) Purchase frequency
Purchase frequency is a piece of data that allows you to understand how many purchases are made by the same customer during a given period. This is essential since it tells you how many purchases your unique customers make over a given period of time and whether your customers tend to make new purchases on your e-commerce site.
Use the following formula:
Purchase frequency = Number of orders / Unique customers
(3) Customer value
Customer value is the average value of your shopping cart multiplied by the average purchase frequency of your customers over a given period. It’s the multiplication of the two pieces of data that we have just explained:
Average cart X Purchase frequency
(4) Customer average lifespan
The customer average lifespan is the last piece of the puzzle. However, it is also the most complicated to understand because it depends on the type of activities you occupy.
Generally speaking, the customer average lifespan is considered to be between 1 and 3 years. However, this piece of data will change depending on your business model: do you offer a subscription service or a one-time purchase?
If your business is a very occasional niche, consider a lifetime of between 1 and 2 years. If you are working on a clothing or decoration brand and your designs are renewed regularly, you can take 3 years as a basis for your calculations.
Calculating the Customer Lifetime Value
Now that we have prepared all the data we need, it’s time to finally discover how much our customers are bringing in during their lives on our site! Here is the formula:
Customer Lifetime Value = Client Value X Average Lifetime
By multiplying the value of a customer over a year (average cart x number of purchases) by the average lifetime of your customers (1-3 years), you obtain the turnover that a customer brings in during his or her period of activity (1-3 years) on your e-commerce site.
Some calculation variants
Before going on to the 5 concrete methods to increase your Customer Lifetime Value, here are some variants of calculating the CLV for those who would like to push the analysis a little further:
(I) CLV expressed in profits: on the same basis as the calculation that we have just made, you can reason in terms of profits rather than in terms of turnover. For this, simply replace the monetary data (previously expressed in turnover) by the profit generated by purchase.
(II) CLV expressed in segments: to further analyze your customers’ behavior, you can analyze the CLV for each segment. For example, you can calculate the LTV for each of your acquisition channels, each demographic or geographic profile, etc. The possibilities are endless, and we can only advise you to push the analysis further.
5 practical methods to increase customer lifetime value
You now have a reliable method to calculate your CLV.
The goal is to increase this customer lifetime value to make each customer more profitable.
While a customer can be expensive to acquire, there are several ways to increase the “customer value” and thus increase the profits from each customer.
Focusing too much on acquiring new customers, and we forget that, according to BusinessInsider, regular visitors are twice as likely to put an item in their cart as new visitors.
Similarly, it is important to know that regular visitors have a lower bounce rate and a better conversion rate compared to new visitors.
Improving your LTV means working on the purchase experience and tunnel, customer service, and brand loyalty.
In short, working on the entire customer lifecycle to maintain a connection with your brand for as long as possible.