How to Calculate Customer Lifetime Value (CLV)
Customer Lifetime Value (CLV) is one of the most important metrics you can track for ecommerce. Not only does it help you pinpoint which of your customers are your best customers, but it helps you learn how to transform shoppers into customers that spend more, buy more often, and stay with your brand longer.
In this piece, we’ll dive deeper into the CLV formula, how to calculate CLV for ecommerce, and some strategies for improving your CLV.
What is Customer Lifetime Value?
Customer lifetime value is the amount of total value (in terms of revenue) that you can expect from a customer throughout their lifetime as your shopper.
Why Customer Lifetime Value Matters for Ecommerce
It costs more to acquire new customers than it does to retain existing ones. Customer lifetime value goes beyond shot-in-the-dark customer retention strategies and allows you to identify exactly where you can get more value out of your existing customer relationships.
What CLV helps you understand:
- At what point a customer becomes more profitable than the cost of acquiring them
- When the cost of maintaining a customer relationship outweighs the value they bring
- Exactly which of your segments are the most valuable, and where value can increase in your other segments
- What CAC (customer acquisition cost) is appropriate in relation to the value each customer earns you
- Which channels are the most profitable for bringing in high-value customers
- Where to focus efforts in increasing revenue (AOV focus, retention focus, repeat purchase focus, etc.).
Information is power, and the more information you have on your customers, the better you’re able to increase the value they bring to your store.
How to Calculate Customer Lifetime Value
When calculating customer lifetime value, you need to do a few calculations first. What you need to know is:
- How long (in years) your customer typically shops with your brand before they churn
- How much your customer spends on average (AOV or average order value)
- How often your customer purchases in one year (repeat purchase rate)
The average order value is simple enough to figure out. Take your total amount of revenue, and divide it by your total number of purchases.
Average purchase frequency, or repeat purchase rate, is also an easy calculation: average the number of purchases each customer makes in a single year.
From here, you simply multiply your average order value by your average purchase frequency and then multiply that by the average number of years in your customer’s lifetime.
The simplest way to calculate CLV looks like this:
CLV = AOV x Purchase Frequency x Customer Lifetime
Customer Lifetime Value Examples
Okay, so let’s take this formula and break it down practically. Say you have an average order value of $50, and your average customer purchases six times a year and shops with you for around five years or so in their lifetimes.
To figure out your CLV, you’d formulate it this way:
CLV = 5 x 50 x 6
CLV = $1500
This helps put your CAC in perspective. If you’re paying $15 to acquire a new customer, this is great news. However, if you’re paying $2000 in customer acquisition, then you’ve got work to do.
What’s significant about this formula is that you can determine exactly where you need optimization. For example, if you’ve got the same AOV and repeat purchase rate, but your customers only stick around for one year, then you need to work on retaining customers after that first year.
If your retention rate is great, and your repeat purchase rate isn’t the issue, then you need to work on your average order value.
CLV helps you make actionable decisions about how to treat your customers moving forward and what concrete actions to take to increase your revenue.
How to Improve Customer Lifetime Value for Ecommerce
Improving customer lifetime value is centered around retention strategies, which are unique for ecommerce stores. Once you’ve calculated your CLV, you know where your biggest opportunities for growth lie.
Use the CLV formula to spot these opportunities and adjust your strategy accordingly.
Retention-Focused Strategies for Improving CLV
Customer retention, regardless of your current retention rate, should always be a priority for online sellers. Your existing customers are far too valuable to give up. If you need to improve your retention, or simply maintain a healthy retention rate, these strategies will help you do so.
- Identify and segment your customers: It’s important to know which of your customers are first-time purchasers and which are your tried and true, loyal customers. Use segmentation by purchase to see not only which customers should get VIP treatment but which you need to prevent from risk of churning.
- Make sure your VIP customers know they’re appreciated: Loyal customers are your bread and butter—reward them for it. Offer exclusive perks, deals, discounts, free gifts, and bundling options to la crème de la crème, and keep them shopping with you over your competitor.
- Create and implement a loyalty/rewards program: Incentivize shopping with your store through earning points that can be redeemed for discounts and other rewards. Not only will a loyalty program help reward your best customers, but it’ll also help you transform your one-time shoppers into loyal customers.
For more excellent ways to keep your customers coming back for more, check out our piece on 9 customer retention strategies that actually work.
Strategies to Increase AOV and Boost CLV
Increasing your average order value is a great way to simultaneously amplify your customer lifetime value, and the best part is that these strategies increase your revenue exponentially.
- Up-sell and cross-sell your products: If you have products that go well together, sell them together—bundles are especially effective at cross-selling for ecommerce. Using product recommendations at critical points of the checkout process, you can get those impulse purchases typically reserved for the candy at a grocery store checkout. It can be as simple as offering gifting options or extra batteries at checkout.
- Use thresholds for free shipping and discounted offers: By creating an achievable minimum threshold for incentives, your customers can easily justify spending a little more to reach them. For example, you could segment your abandoned cart messages by a certain dollar amount left in the cart. You could then personalize the cart abandonment workflow that these customers receive to include a minimum threshold to earn a discount: “You’re only $15 away from 10% off your purchase!”
- Leverage that handy loyalty program: If your customers can earn more points by adding a product they were already considering buying, it’s easier to justify with the promise of future rewards. Use your loyalty program to your advantage in the cart and checkout pages to boost last-minute decisions.
Increasing AOV is such a simple way to earn more revenue and make calculating CLV work for you.
Increasing CLV through Repeat Purchase Rate Strategies
We know that the more frequent a customer purchases from you, the more likely they are to make a future purchase. Increase the number of purchases your customers make over their lifetime with these strategies.
- Employ post-purchase automated messages that reconvert: The average conversion rate of post-purchase messages is 20%. That means that one in five recent purchasers repurchase! From gathering important feedback to product recommendations, post-purchase emails keep your customer engaged beyond their most recent purchase. Include your loyalty program rewards in your post-purchase workflow to help incentivize the next purchase.
- Send relevant and timely messages: Don’t rely on batch promotional messages alone to increase CLV. Automating behavior-based emails, such as browse and product abandonment, ensures your emails are sent to the right customer at the right time. It’s no wonder both browse and product abandonment emails have conversion rates greater than 20%.
- Use retargeting messages: Keep your products in front of your customers by placing product recommendations or special offers in retargeting ads. You can time these alongside your post-purchase messages to create a cohesive ecosystem that keeps your products in your customers’ minds.
These various strategies for customer retention, AOV, and repeat purchase rate are relatively simple to implement, and they all work together to increase your CLV. Even if you have a solid customer lifetime value, neglecting these strategies means you’re leaving money on the table.
Increasing your CLV is the most sustainable way to increase your revenue. Unlike quick tricks and tips, improving CLV is an investment in the health of your ecommerce store. By investing in your customers first, not only will they be more loyal to your brand, but they’ll reward you by spending more and purchasing more often.
What are your best tips for improving your CLV? Tell us below!