How To Increase Customer Lifetime Value

customer experience header

Customer Feel

How to Summate and Abound a Strong Customer Lifetime Value

Customer loyalty and lifetime value become mitt in hand, and have a direct impact on your lesser line. Here's how to calculate and maximize your LTV, thereby increasing revenue.

Concluding Updated: June fourteen, 2022 14 min read

You've heard of Customer Lifetime Value (LTV). You know that it'southward important and that companies who can increase overall LTV can significantly increase their lesser line.

You lot've probably even heard the stats, like that the top one percent of ecommerce customers are worth a whopping xviii times more than the average customer. You know that approximately 80 percent of your futurity revenue volition come from xx pct of your most loyal customers, and that increasing customer retention rates by 5 percent can result in an amazing 25-95 per centum increment in revenue.

Yous've also heard that LTV is critical for calculating metrics such as desirable customer acquisition cost; only how does one calculate Client Lifetime Value?.

In this post, we're going to break down:

What Customer Lifetime Value actually is
Why it matters so much to your ecommerce store
A unproblematic way to calculate your LTV
Ways to better and increase your LTV

By the time we're done, you'll be able to attend ecommerce cocktail parties (or mayhap fifty-fifty conferences) and audio like a seasoned vet as you hash out LTV.

What Is Customer Lifetime Value?

On the surface, LTV is a rather simple concept. Like the name says, it's how much an average customer will spend with your business over the lifetime every bit a customer.

It's the boilerplate cumulative full of all of their purchases for the duration of time that they're purchasing from you.

Let's say you have two customers named Eric and Erin.

Eric ever wants to shop around to detect the best deal. He's not particularly loyal to whatever one brand, and is willing to purchase from but about anyone equally long equally he feels like he's getting a proficient bargain. Price matters more human relationship to him. Eric occasionally purchases from your site, just only when you're offer the lowest price on a item product.

Erin, on the other paw, likes to find brands she loves and then stick with them for the long booty. You happen to be Erin's favorite ecommerce store for purchasing household appurtenances, and she buys near everything from you.

Out of the ii, who will accept the college lifetime value as a customer? Manifestly, it's Erin. Simply, and this is critical, your average LTV is not based on Erin alone. It's based on the boilerplate cumulative total of all the purchases of all your customers, including loyalists like Erin and those who store around, similar Eric.

This starts to get to the centre of why this metric matters and so much. If you accept 50 customers like Eric and four customers similar Erin, your LTV is going to be low, which then negatively affects a host of other aspects of your business organisation. Allow's break this down a little more.

Why Is Customer Lifetime Value Then Important To eCommerce?

LTV is far more of import than about ecommerce shop owners realize. Here'south why:

LTV Determines Whether Yous Tin can Scale

Generally speaking, your Customer Lifetime Value should be at least three times greater than your Customer Conquering Price (CAC).

In other words, if you're spending $100 on marketing to larn a new customer, that customer should have an LTV of at to the lowest degree $300. If it's non somewhere in that 3:i ballpark, your profit margin won't be loftier plenty to calibration your business.

Recall, your LTV has to substantially cover all the expenses associated with each customer. This includes marketing, aircraft, customer service, the specific applied science yous use, and much more than.

Without a iii:1 LTV to CAC ratio, scaling is going to be really difficult. You'll be operating with razor thin margins and constantly have to be fighting for new customers, which is e'er a precarious position. One downward month tin can throw off your entire concern.

LTV Helps You lot Evaluate Your Memory Strategy

If you have a depression LTV, information technology means you either need a new customer retention strategy or need to significantly revamp your existing i.

If your retention strategy isn't constructive, it means yous must constantly acquire new customers to maintain acquirement. Your ad spend is going to be much college and your ROI on that ad spend will be depression. If at that place always was a lose-lose situation, this is information technology. Additionally, without loyal customers, you become vulnerable to ups and downs in the market.

When the economy takes a downturn, customers who aren't loyal to your make will get to the seller with the lowest price.

LTV Allows You To Make up one's mind The ROI Of Your Marketing Efforts

There's a relatively uncomplicated way to make up one's mind how well your marketing efforts are working: compare your Customer Lifetime Value to your Customer Acquisition Cost. The lower the ratio, the lower the ROI you're getting on your marketing efforts.

For instance, if you have to spend $200 to acquire a client, and your LTV is $200, your marketing efforts are well-nigh a consummate wash. You're not really adding annihilation to your bottom line, and you're setting yourself up to eventually run out of coin.

No 1 tin operate at a 0% profit margin for long (unless y'all're independently wealthy and running your store for kicks, in which instance you probably can stop reading now). Equally Kevin Donnelly notes:

"Customer Lifetime Value (CLV) is ane of the almost important factors in determining your business' present and future success. It's an often-overlooked metric that can accurately predict how much your customers are actually worth. By measuring the net profit that you'll have in over the course of your unabridged relationship with a customer, y'all'll be able to narrow downwardly exactly how valuable they are to your business."

Enjoying this article?

Subscribe to our newsletter to get more just like it, sent straight to your inbox every calendar week.

LTV Enables You To Compare Yourself To Manufacture Averages

Client Lifetime Value varies wildly across industries and depends on numerous factors.

For case, if you're selling a frequently consumed particular such as coffee, your LTV will probably exist higher than someone selling loftier-quality leather wallets that only need to be replaced once every five years (unless the wallets are incredibly expensive).

Using LTV can assistance y'all determine where you rank among your competitors. If your LTV is significantly lower than the industry average, you conspicuously have some work to practice if yous want to crush your competition.

A Simple Model For Computing LTV (Footstep-Past-Stride)

While at that place are certainly more circuitous ways of calculating LTV, you can utilise the following method to get a general ballpark figure.

Pace #1: Determine Your Average Guild Value (AOV). Your AOV is calculated by taking your total revenue during a given time menstruum and dividing it by your total number of orders. If your total acquirement is $1,000 and your full orders are 10, your AOV is $100. Elementary, correct?
Pace #2: Calculate Your Average Buy Frequency. This metric represents how frequently customers purchase from yous. Yous summate this by dividing your total number of orders during a given fourth dimension menstruation by the unique number of customers. If you've had 1,000 orders from 10 unique customers, your Boilerplate Purchase Frequency is 100.
Stride #3: Estimate Your Customer Value. You're almost to lifetime value. Multiply your Average Order Value by your Average Purchase Frequency to get an gauge of your customer value. In this case, $100 x 100.
Step #3: Estimate Your Average Customer Lifespan. Substantially, this represents how long a person remains one of your customers. Information technology'southward the average time a person remains an active client before they go dormant. If you want to simplify things, y'all can follow the advice of analytics expert Avinash Kaushik who suggests a 1-three year timespan. For ecommerce brands with a limited catalog, he recommends estimating on the shorter end; and for stores with changing or regularly growing catalogs, the longer stop.
Step #iv: Summate Your Estimated LTV. Multiply your Customer Value past the Client Average Lifespan to get an gauge of your Customer Lifetime Value.

In summary:

Average Social club Value x Boilerplate Purchase Frequency = Client Value

Customer Value 10 Average Customer Lifespan = Estimated Customer Lifetime Value

If you desire to dive deeper into the numbers, you tin segment your LTV by calculating Customer Value by aqueduct. This allows you to see which channels take the highest LTV and which are struggling. Once you have a full general guess of you LTV, y'all tin calculate approximately how much y'all should spend on Customer Acquisition. If you find yourself unable to learn customers at or below the 3:1 ratio noted in a higher place, it's a sign that you probably need to exercise some optimization work on your site and with your advertising.

How Do Yous Increase Customer Lifetime Value and Client Loyalty?

This really isn't that complicated. To increment LTV, you lot need to increment either your Average Order Value or your Average Purchase Frequency. A bump in either of these metrics volition lead to a ascension in your LTV. First by reflecting on your own feel. What things cause you to purchase more? If you're an Amazon customer, you probably don't need to think also hard.

Maintain a minimum threshold for complimentary shipping. Amazon uses this method with their Pantry items. In social club to even buy some Pantry items, your social club needs to exceed a sure dollar corporeality. This essentially forces a customer to increment their Average Lodge Value. You can implement something similar on your site by shipping items for free once the total order amount exceeds a predetermined corporeality.
Promote complimentary relevant items. The moment y'all put something in your cart, Amazon starts recommending other relevant items. If you're purchasing a set of weights, they'll recommend protein powder, a weight bench, and a dorsum support belt. They know that once you've put an particular in your cart, you lot're more likely to purchase other things. Implement a similar practice on your site by promoting items that will complement what customers are already purchasing.
Establish the value of your product. To state the obvious, being able to sell more than expensive items increases the Boilerplate Lodge Value. Just in order to do this, you lot need to work difficult to constitute both the quality and high value of your product. Retrieve of Rolex and Mercedes. All their marketing reinforces the idea that their products are of the highest quality and for those who desire to experience luxury. You tin can deploy a similar strategy on your site. Through the images, copy, and reviews, you tin demonstrate that even though your product may cost more than, it's worth it.
Create package deals. Information technology's hard to resist parcel deals. Any fourth dimension you lot tin bundle together items and so reduce the cost (within reason), you're going to drive up your Average Society Value. Why? Because this appeals to both the loyalists and the bargain hunters. The loyalists will view package deals every bit even so one more than reason to love you. The bargain hunters will be happy because they got a great deal.
Offer loyalty perks. At that place's a reason that stores have used loyalty programs for decades. Whether information technology'due south the Subway punch card that gets you a gratis sub afterward you buy five or the Walgreens point organization which gives you redeemable points based on how much y'all spend, loyalty programs work. What sort of loyalty programme tin y'all create on your site? How can yous reward faithful shoppers and entice them to come back once again and again? Don't be agape to get artistic with this.
Create a smoother shopping feel. Friction is anything that gets in the way of a client making a purchase. Information technology tin be besides many fields on an society form, confusing navigation options, or surprise shipping costs. Eliminating friction through conversion rate optimization techniques can dramatically increase your average order value. Consider all that Amazon does to remove friction, from ane-click ordering to Prime shipping, to ordering simply by speaking to Alexa. They know that less friction equals more purchases.

In one case you've determined how to increase your Boilerplate Order Value, y'all need to turn your attending to increasing the Average Buy Frequency. Once more, there are a number of relatively simple ways to practice this.

Utilize email campaigns. Sending regular emails to your customers accomplishes at least 2 things for your business. Get-go, they but remind customers of what you offer. The unfortunate reality is that many customers will order from you one time and then forget about yous the adjacent time they need to brand a purchase. Emails keep yous at the front of their minds. 2nd, emails allow y'all to highlight special sales and offers, which can cement the loyalty of some customers and reignite the interest of dormant ones.
Implement remarketing/retargeting. Using remarketing technology like the Facebook Pixel, you can ensure that your ads show up in forepart of your customers again and again. When a person visits your site, the pixel is placed in their browser. Then you can target Facebook ads directly at these visitors; and then that equally they're scrolling through their newsfeed, your brand shows upward constantly. When implemented properly, this strategy tin atomic number 82 to customers coming back once again and again.
Double down on customer service. Why is it that companies like Trader Joe's and Zappos have such cult followings? It's because they go over the acme when it comes to customer service. Equally Help Scout noted about Trader Joe's: An elderly man, 89 years of historic period, was snowed in at his Pennsylvanian domicile effectually the holidays, and his daughter was worried that he wasn't going to take access to enough food due to the impending storm and bad weather in the area. Afterwards calling multiple stores in a desperate attempt to find anyone who would evangelize to her father's home, she finally got ahold of someone at Trader Joe'due south, who told her that they also do non evangelize…normally. Given the extreme circumstance, they told her that they would gladly deliver directly to his domicile, and fifty-fifty suggested additional delivery items that would fit perfectly with his special low-sodium diet. After the daughter placed the order for the food, the employee on the phone told her that she didn't need to worry well-nigh the price; the food would be delivered free of charge. The employee then wished her a Merry Christmas. It's this kind of customer service that brings customers back once again and again. Did the Trader Joe'south employees have to make a delivery in a snowstorm? Of course not. But the visitor knows that customer service translates into college LTV, and so they're willing to practise whatever it takes.
Better the overall customer experience. Just as with Average Order Value, improving the overall customer experience also leads into increase purchase frequency. This makes sense on an intuitive level. If a site is difficult to navigate, makes information technology difficult to find the correct products, or has a cumbersome checkout procedure, customers won't return. On the other mitt, if a client has a smooth, frictionless shopping experience, they're more probable to come back once more and over again. Utilizing conversion rate optimization to remove friction tin consequence in big gains in terms of buy frequency.

Determination: Loyalty = Acquirement

Have you ever wondered why L.L. Bean offered a lifetime return policy on all their items? On the surface, this seems similar a crazy idea. A person can purchase a shirt and return it in tatters twenty years after. The render will be accepted with no questions asked.

Why would the company do such a thing? Because they know that this kind of return programme massively increases their customer loyalty. After all, if you can literally render annihilation at any time with no strings fastened, at that place'southward very little chance in buying. Additionally, it shows the generous spirit of L.L. Bean, which resonates on a deep level with customers.

Does this render policy cost the company a lot of money? Certain. But they're willing to accept those costs because of the increased Customer Lifetime Value it generates. You certainly don't need to become to those lengths to increase your overall LTV, merely you would exist wise to acquire from L.L. Bean. It really is only a numbers game for them.

They know that loyalty equals revenue, and they're willing to have huge steps to increment that loyalty.

Are yous willing to do the aforementioned?

Enjoying this commodity?

Subscribe to our newsletter to get more just like it, sent straight to your inbox every calendar week.

About the Writer

Jon MacDonald

Jon MacDonald is founder and President of The Proficient, a conversion rate optimization firm that has achieved results for some of the largest online brands including Adobe, Nike, Xerox, Verizon, Intel and more. Jon regularly contributes content on conversion optimization to publications like Entrepreneur and Inc. He knows how to get visitors to take action.

Source: https://thegood.com/insights/increasing-customer-lifetime-value/