Updated: Sep 7
Entrepreneurs dream of building a business that caters to millions while also keeping their focus trained on satisfying every individual customer. A happy customer keeps coming back, tells more people about your brand, and continues to place a certain amount of trust in you.
Indeed, it costs five times as much to sell to a new customer than an existing one. Plus, only 18% of eCommerce businesses today focus on customer retention, and this represents massive untapped potential for every eCommerce retailer today.
That is the basis for the term Customer Lifetime Value (CLV or CLTV). CLV is a metric used to measure the total revenue a single customer account is expected to bring to the business throughout the business relationship.
In purely transactional terms, Customer Lifetime Value represents the total amount of money a single customer might spend on your products or service, during their entire lifetime
Why is Customer Lifetime Value important?
Businesses have to continually balance two equally important needs- acquiring new customers and retaining existing ones. If the cost of acquisition exceeds the value new customers might bring to the business in terms of fresh revenue, it could drive the business into trouble.
CLV is the vital figure that tells you how much you should invest in acquiring new customers while retaining and polishing your profitable relationship with existing ones. Therefore, CLV is a highly customer-centric metric that customer-oriented businesses such as retail and eCommerce businesses simply cannot afford to ignore.
In addition to this, knowing your CLV has the following advantages:
Knowing what products your paying customers are buying the most
Zooming in on your most profitable customer profile/ the kind of segment(s) to target
Knowing what products are paying off and what inventory you should invest in
Collectively, these add up to sustainable revenues over time. By improving the customer experience overall, the CLV can help you retain happy customers and figure out ways to leverage more revenue from less valuable prospects as well.
How is CLV calculated?
The simplest way to calculate Customer Lifetime Value is by using the CLV formula:
CLV = the average value of a purchase X number of times the customer will buy each year X the average length of the customer relationship (in years).
For example, if the average sale at a clothes boutique amounts to Rs. 4000, and the average customer has shopped at the store thrice a year for two years running, the CLV for this particular customer is calculated thus:
CLV = 4000 x 3 x 2 = Rs. 24,000
To break it down even further, there are four notable KPIs that influence your lifetime value:
1. Average Order Value = Total Sales / Order Count.
2. Purchase Frequency = Total Orders / Total Customers.
3. Gross Margin = Total Sales Revenue – Cost of Goods Sold (COGS) / Total Sales Revenue (expressed as a percentage)
4. Churn rate= (number of customers at the end of a time period – number of customers at the beginning of time period) / number of customers at the beginning of time period
Not so simple as it sounded at first? Well, calculating the Customer Lifetime Value can sometimes take you into the realm of complex retail math.
While the Customer Lifetime Value formula does give you the final figure, it is important to closely scrutinize each one of these sub-parameters.
Which elements have the maximum impact on your CLV? Can you increase your CLV by reducing churn- and if so, how do you do this?
CLV as a metric can open up several questions, the answers to which have serious business impact.
Steps to boosting your customer lifetime value
Selling to customers who are already sold on your product value, so to speak, is easier than getting new prospects to convert. Research shows that for eCommerce in particular, the probability of selling to a pre-existing customer is 60-70% as opposed to selling to a new shopper (between 5-20%). Moreover, returning customers, assured of the product quality and service, spend 67% more than first-time customers, who are just testing the waters.
It is therefore logical that you invest a significant chunk of resources in keeping your existing customers coming back.
While hoping to cultivate existing customers and boost your customer lifetime value, it is important to keep these guidelines in mind:
1. Personalization always rules
Experiential retail is the buzzword for brick-and-mortar shopping. The same can today be extended to online shopping as well, and personalization is one way to deliver a memorable experience for your online customers.
This can be achieved by adding personalized recommendations to the site based on data collected about the customer: age, gender, style preferences, color preferences, items most bought, and so on. The clincher is when the recommendations are based on the ideal price point for each individual customer. Then it truly becomes a bargain they cannot refuse.
2. Everyone loves convenience
The ease of returning their purchase for a replacement or refund is a big factor in bringing customers back. Make them jump through hoops to simply return or exchange their purchased item, and you can be assured that the odds of them returning to your website or store are next to nothing.
Businesses offer multiple ways to shop across various sites and devices. Arranging a return should be just as versatile and easy. By making the process smooth and seamless when customers wish to return their purchase, you win major brownie points.
3. Underpromise and overdeliver for customer delight
Online businesses should set realistic expectations on the delivery timeline in which a customer can expect to receive their purchase. Exceeding the timeline can lead to order cancellations, complaints, and refund requests simply because the delivery was delayed beyond the promised date.
Ensure extra support for new customers by making onboarding a priority. A pampered first experience paves the way for repeat business.
When it comes to customer service in eCommerce, radical transparency is your best friend. Consumers today look for dependability, much more than they expect faster deliveries. Independent eCommerce retailers who are contextual and communicative have a lot to gain on the brand trust front.
4. The triad of customer delight: rewards, upsells, and freebies
In a digital world where many businesses compete for a piece of the same target audience, loyalty must be rewarded. Your rewards program should be full of goodies that your clientele will love to win.
Making your customers feel special is a great way to encourage repeat buying. Offer curated product bundles for special occasions, free goodies that are actually worth winning, experiences that your consumers might enjoy- these are all ways to engage your audience beyond the transaction alone.
5. Always stay connected
Find ways to remain in touch with your early or long-time customers, or that elusive customer who shows up to buy once in a blue moon. Sending them personalized newsletters with offers on items similar to the one they purchased, at a tempting price point, reminds them that their business is still valuable to you, that they are still not forgotten.
Optimize your communication channels (email, newsletters, social media, SMS, etc.) to ensure you are connected with your customers in a manner and frequency they prefer.
That’s all, folks!
We hope this article has helped you decode CLV and its real-world interpretation, and given you some interesting ideas on how to attract and retain long-term customers and repeat buyers.