Customer Lifetime Value: What is it, How to Calculate it and 5 Strategies to Increase it in 2020

Every business process needs to be compared against pre-defined benchmarks, optimized, and then compared again. Doing this means your business is constantly improving and evolving.

Define, measure, and optimize is a pretty straightforward approach, but far too many eCommerce stores (and even offline businesses) are limiting this strategy to popular metrics like sales and revenue.

Yes, those metrics are incredibly important but there are hundreds of other metrics that if measured can significantly improve your operations.

I’ve already talked about one such metric – average order value, why it’s important, and how to improve it. Today, I am going to be talking about a different metric but equally important – customer lifetime value (CLV).

What is Customer Lifetime Value?

Customer lifetime value (CLV) is the monetary value your business generates from a single customer over the entire period they are your customer. In other words, it’s the amount of money a customer is expected to spend on your business in a lifetime.

CLV is a monetary value so it’s calculated in dollars. Here’s how you can calculate Customer Lifetime Value (CLV).

How to Calculate Customer Lifetime Value?

To calculate your customer lifetime value, you need to multiply the amount spent on average per purchase by the number times a customer makes a purchase (on average). Complicated? Here’s the formula:

Average order value X Average purchase frequency X Average customer lifespan = Customer Lifetime Value

This might seem confusing but it’s really not. Let’s start with the average order value (AOV).

The average order value is the amount of money spent by a customer on each purchase. Average order value can be calculated using this formula:

Total annual revenue/Number of purchases that year = Average Order Value

The AOV is a very important metric if you’re looking to improve the customer experience (and your bottom line). We’ve covered it in-depth already.

The second part of the equation is the average purchase frequency which represents how many times a customer makes a purchase in a year. To calculate this, simply divide the number of total purchases with the number of unique customers.

Number of purchases/Number of unique customers = average purchase frequency.

The final part of the equation is the Average Customer Lifespan.

Average customer lifespan refers to the amount of time (in years), a customer is likely to continue making purchases. In other words, it’s the length of an average customer relationship. To calculate customer lifespan, average the number of years customers continue making purchases.

Multiply all three of these metrics and you get the Customer Lifetime Value.

5 Effective Tactics To Increase Customer Lifetime Value in 2020

1. Increase Order Value

One of the most effective methods of increasing customer lifetime value is by encouraging customers to spend more on each purchase. This means you’ll have to invest time and money into increasing your average order value (AOV). Thankfully, we’ve already covered that in one of our previous guides but here’s the gist:

Upselling and Cross-selling
Setting a minimum order value for availing free delivery
Discounts when buying in bulk or when buying bundled items
Offering a gift wrap option
Offering incentives like cashback, promo codes that on minimum order values, and “Buy x Get x”

2. Email Marketing

Email marketing has one of the highest ROI out of any other online marketing channel, significantly more than SEO and ads (both keyword and display). This effectiveness is partly because email marketing and company newsletters act as reminders.

Most customers don’t shop again at the same eCommerce store not because they don’t like the store but because they simply forget about it – especially if its niche. Email marketing means you can retarget those leads and since they’re already your customers, they’re more likely to convert again.

Retargeting is at the core of increasing customer lifetime value and there is nothing better at retargeting then company newsletters.

3. Social Media

But what if your target audience doesn’t check their emails very often? There is also a chance that your emails are ending up in the “spam” or “promotions” box that almost no one checks. In that case, you must be active on social media.

What does it mean to be active on social media? It means to engage with your audience. Post educational content, start polls, ask for feedback, start giveaways/contests, and most importantly, reply to your customers’ messages.

4. Loyalty Programs

Loyalty programs are excellent at not only increase the average order value but also the average customer lifespan (thereby increasing the customer lifetime value). According to a 2018 report, 77% of consumers say loyalty programs make them more likely to stay with brands and 63% of consumers say they modify their spending habits to maximize loyalty benefits.

Loyalty programs can seem complex but you can start experimenting with basic loyalty programs like giving x number of discounts on future orders on sign-up. Another popular strategy (albeit, more complex) is points and rewards system.

5. Subscriptions

Giving benefits like free or faster shipping to customers who subscribe to a subscription is a sure-fire way of growing the customer base and increasing the customer lifetime value. The biggest example of this would be Amazon Prime which arguably made Amazon the biggest eCommerce store on the planet.

Subscriptions have become a lot more popular coming to 2020 because of its appealing revenue system – companies get paid every month instead of just once. One of the biggest companies that have been doing this for a while now (and succeeding) is Adobe with its Creative Cloud subscription.

However, it’s important to note that Adobe is used mostly by professionals and businesses which means the regular payments can be justified as a business expense. So if you’re thinking of completely pivoting towards a subscription-based model, make sure your target audience can justify it.

If not, then make subscriptions an option, not a requirement.

Conclusion

Customer lifetime value is a powerful metric that adds different perspectives to your customer experience strategy. It gives eCommerce store owners another metric to compare and optimize their customer acquisition, marketing, and retargeting spending against. The above 5 strategies can be used to improve the customer lifetime value in 2020 and beyond.