Your A-Z Guide to Customer Lifetime Value and How to Make the Most From It

Customer lifetime value (CLV) is the customer satisfaction standard of your goods and products on offer. CLV measures the amount of revenue generated through a customer in the time they bought your products. 

CLV is a marketing tool that helps a company understand its customer base. Ever wondered why VIP customers exist? They have the maximum CLV score while trading with the company. 

The Importance of Customer Lifetime Value in eCommerce

CLV is not a mere marketing metric to enhance your revenue. It clinically represents the customer behavior and spending pattern. Most important, it helps you prioritize your customer value in marketing. 

The benefits of measuring and tracking your company’s CLV are as follows:

• Helps you provide necessary incentives towards your loyal customers, besides venturing for new clients.
• Lowers customer acquiring costs.
• Allows you to assess your operation’s weak points and work towards dedicated delivery facilities.
• Delivers fruitful customer experience.

A reliable eCommerce with high customer trust offering state-of-art products at a discounted rate commands the best customer lifetime value example.

How to Calculate CLV

The customer lifetime value formula uses the customer value (revenue brought through the customer) and multiplies it with the retention time (average customer lifespan).

To understand CLV, we need to emphasize AOV (average order value), F (purchase frequency), lifetime value of customers (1/churn rate), and GM (gross margin). 

Calculating AOV (Average Order Value)

AOV formula = Annual sales revenue generated/Total annual order

For instance, company X generated an annual sales revenue of $200,000 and received annual order of 4000. 

Therefore, the AOV of company X = 200,000/4000 = 50.

Calculating F (Purchase Frequency)

F = Total annual order/Total customers

Company X has an annual customer of 1000. Therefore, the company’s purchase frequency (F) = 4000/1000 = 4.

Calculating Gross Margin (GM)

GM is a percentage calculation of the profit a company incurs besides the expenses into account. 

GM = (Annual sales revenue – Cost of products sold)/Annual sales revenue * 100

To calculate the Cost of Products sold, you should consider the beginning inventory at the start of the last financial year, additional purchases in the current year, and the ending inventory that’s left at the end of the financial year. 

Cost of Products sold = Beginning inventory + Additional Purchases – Inventory left. Here’s how you would calculate GM for company X: 

• Beginning inventory = $20,000
• Additional purchases = $90,000
• End inventory = $16,000 

Cost of Products sold = 20,000 + 90,000 – 16,000 = $94,000

Total Sales Revenue = Annual sales revenue – Beginning inventory = 200,000 – 20,000 = $180000

% of GM = (180,000 – 94,000)/180,000 * 100 = 47%

Calculating Churn Rate

% of Churn rate = {(Customers participated at the beginning – Customers retained at the end)/Customers participated at the beginning} * 100

Taking the same example of company X, let’s assume that they had 80 customers at the beginning and successfully retained 60 customers in the end. 

 The churn rate of company X would be:

% of Churn rate = (80-60)/80 * 100 = 25%

Retention Period = 1/25 = 0.4

Calculating Customer Lifetime Value

Now that we have figured out all the components, let us calculate the lifetime value of customers of company X:

• AOV (average order value) = 50
• F (purchase frequency) = 4
• GM (Gross Margin) = 0.47

Customer lifetime value period (1/churn rate) = 0.4

Customer lifetime value formula for Company X = AOV * F * GM * 1/churn rate = 50 * 4 * 0.47 * 0.4 = $37.6

How to Improve CLV

• Develop personalized emails to reach out to your customers based on their segment interest.
• Offer them a freemium scheme. Your customers would adore the best-in-class features of your goods, besides hardly minding to spend a little extra to upgrade. 
• The magic of coupons does wonders! Special offers and extra discounts would only ensure your loyal customers stay tight besides attracting a new crowd.
• Courtesy emails are the new trend! Leave thank you emails for every successful purchase, adding an extra layer of empathy to your services. 
• Use social media to connect, interact, and convert interested individuals into potential clients.
• Shower your loyal clients with a free trial of the loyalty program. Treat them special only to have them subscribed after the trial ends.

Using Customer Data Platforms to Enhance Your CLV

A customer data platform can introduce eCommerce merchants to a massive amount of valuable information from multiple sources. Not only this, but it can also analyze the data for merchants to identify their target audience and retain loyal customers.

You can enjoy the following advantages with a dedicated customer data platform:

• Classify customer value in marketing to understand customer behavior.
• Customer lifetime value analysis helps you provide a holistic customer experience.
• Access data from multiple databases while designing individual solutions for your unique customers. 

Strategies to Maximize Conversion Using CLV

A satisfied customer is the best business policy. Here are some of the proven tactics that can maximize CLV:

• A warm welcome is the best start. Nothing assures your customers more than a smooth onboarding procedure, service with a smile.
• Offer them not what they want but what they need. Let your customer think and decide what’s best for them. 
• A 24/7 customer support service is best when you have clients all over the world.
• Live-chat service to address their issues at the convenience of the customers
• Showcase a DIY guide to aid your customers in using the products.
• Connect with them at a personal level that includes adding a special complimentary gift on their special days.
• Offer your privileged customers a subscription and annual billing cycles. It helps the customer eliminate crunch times while you get a steady CLV.
• Flash sells because your customers deserve to buy at a discounted rate.
• Maintain robust connectivity using social media, personalized emails, wishing them luck on special days.
• Provide unique products and services that compliment your customer only to buy from you on every occasion.

In Closing

Customer data platforms have garnered quite
a lot of fame in the last few years, mainly because they can help eCommerce businesses boost the lifetime value of their customers. As a result, enterprises across the globe are creating a repository of client data from multiple sources and gaining valuable insights from it with platforms like RecoSense.