If you’re in the ecommerce business, you already know how challenging it is to acquire new customers. Gaining the consumer’s attention in a crowded market where they are getting bombarded with marketing messages from your competitors every second is no easy job.
In fact, it was found that acquiring a new customer can cost you five times more than retaining an old one.
It was also found that the success rate of selling to an existing customer is 60-70%, while the success rate of selling to a new customer is 5-10%. And that’s why you now see that brands are focusing more on customer retention.
And the very first thing they’re addressing is the customer lifetime value.
What is Customer Lifetime Value (CLTV)?
Customer lifetime value, or CLTV, is a measure that tells you how much you will earn throughout your relationship with that single customer.
Suppose you’re an ecommerce brand selling a product worth $100 to a customer. But the customer was unhappy with your product and never returned to your business after the first purchase. In this case, your CLTV is low because you make just $100 throughout the relationship course with the customer.
But say you sell a product worth $50 to a customer. The customer was satisfied with the purchase and returned to you every month to buy the product worth $50 for the next three years. In this case, you have a higher CLTV value because you make:
CLTV = $50 x 12 ( once every month) x 3 (years) = $1800
This means that you make $1800 throughout your relationship with the customer.
How to calculate Customer Lifetime Value (CLTV)?
Customer lifetime value is calculated by multiplying customer value with the average customer lifespan.
So, to calculate the CLTV, you need to first find the customer value. This can be calculated by estimating the average sale value, the average number of transactions, and the duration of the business relationship with the customer.
The formula for calculating CLTV is:
CLTV = Customer Value x Average customer lifespan
Let’s calculate the CLTV of a hypothetical ecommerce company to better understand CLTV.
The average sale for a Shopify brand is $60. The average transaction per customer is four times per year for the last three years. Now, let’s calculate the customer lifetime value of this customer:
Customer value = average sales value x average number of transactions
= $60 x 4
Therefore, customer lifetime value (CLTV) = customer value x average customer lifespan
= $240 x 3
= $ 720
Why is calculating CLTV important?
CLTV is an important metric that helps businesses to gauge their relationship with their customers and guides brands to tweak their marketing strategies, customer service policies, and marketing budgets.
Some of the important benefits of focusing on CLTV are:
1. Offer better customer experience
Data says 82.5% of customers are likely to buy from brands when they are satisfied with the customer experience. CLTV is an important metric that helps brands understand how satisfied customers are, and brands that focus on CLTV tend to offer better customer experience.
2. Predict customer relationship
CLTV helps brands to understand the long-term relationship with their customers. This helps brands estimate future revenue based on which brands can adjust their sales and marketing strategy.
3. Customer relations means more revenue
It’s easier to sell to repeat customers than acquire and sell to new customers. So, CLTV helps to understand the customer relationship with the business.
4. Better resource allocations
Knowing your CLTV helps you find the right customer segment that will fetch more business reviews. This helps you focus on targeted marketing efforts rather than spending on segments that won’t bring you much business.
How to improve your Customer Lifetime Value (CLTV)?
Now that you know what CLTV is and why it’s so important for your business, let’s understand how you can improve it.
1. Know your CAC
Knowing your customer acquisition cost or CAC is the first step to improving your CLTV. CAC is a measure that tells you how much you spend to acquire a new customer. You take into consideration all marketing and sales costs while determining your CAC. Here’s the formula to calculate your CAC.
CAC = (Marketing Cost + Sales Cost + Wages for the marketing and sales team Overhead Cost) / Number of customers acquired over a period of time
Understanding your CAC and return on investment can help you determine if your marketing and sales efforts are paying off. A lower CAC can improve your CLTV significantly.
2. Understand CLV
To improve your CLTV, you need to first know your CLV, as we discussed earlier CLV can be calculated using the following formula:
CLV = ( Average purchase value x purchase frequency) x Average customer lifespan
3. Customer feedback is important
One of the key factors in retaining customers for a longer time is improving the customer experience. Customers who are happy with your brand are more inclined to purchase from you, so it’s important to capture the emotions of the customer and work on them as necessary. Having a customer feedback app or a survey form within the website is a good way to capture the emotions of the customer.
4. Improve customer service and support
One of the best ways to woo your customers is by offering great customer service and support. A survey report mentions that 36% of respondents stated that customer service motivates them to keep returning to a brand.
To improve customer service and support, find out which channel the customers prefer for support. Is it social, live chat on the website, or self-serve? Knowing these details can help you improve your service and CLTV in the long run.
5. Personalize campaigns to build rapport
Knowing your customers well can help you send targeted campaigns and personalized messages to help you sell more and improve CLTV. So, how can you send personalized campaigns?
- Knowing your buyer’s purchase history and sending them recommendations accordingly
- Emailing back customers when their favorite products are back in stock
- Send recommendations based on the customer’s preferences ( dietary restrictions, skin type, sizes, etc.)
- Using the name of the customer in the email helps to sell.
6. Offering loyalty points
Show some love to your loyal customers by offering loyalty points and rewards for repeat purchases. Lucrative loyalty programs can help you cross-sell and upsell, which can improve your CLTV in the long run. In fact, a report mentions that 80% of companies reported a positive ROI when they offered loyalty programs.
7. Focus on customer churn
Customer churn or customer attrition means when a customer cancels or doesn’t renew in a short period of time. Customer churn denotes a dissatisfied customer, and businesses should focus on keeping the churn rate as low as possible. Churn can happen for many reasons like low product quality, poor customer service, product being too costly, etc. Gathering regular customer feedback can help brands identify the actual reason so that they can fix it, reduce churn, and increase their CLTV.
8. Segmenting customer lifetime value
Segment the customers based on their CLTV value to better focus your marketing efforts. For example, you may have three distinct segments:
- Low CLTV customers who are occasional buyers, and the repeat purchase rate is low.
- Medium CLTV customers who buy regularly, but the order values are low.
- High CLTV customers who purchase regularly with high order value. They are your loyal customers who also recommend your products to others.
9. Strong customer relationship is the key
Happy and satisfied customers are the key to having a better CLTV value. So brands must focus on building strong customer relationships apart from having a great product and a strong customer support system. Some things that can be done:
- Personalize communications
- Gather and act on customer feedback and let them know when you implement those feedback
- Offer omnichannel customer support
- Create a community on social media
10. Upsell and cross-sell products
Up-selling is a tactic to persuade the customer to buy a product of higher price value, while cross-selling is selling a product that complements the original product. Upselling and cross-selling both help in improving the CLTV value of a customer.
11. RFM model to improve CLTV
Recency(R), Frequency (F), and Monetary (M) model, or in short, the RFM model, helps you segment your customers based on how recently the customer has purchased, how frequently they purchase, and how much they spend on each purchase. Segmenting your customers based on these three parameters can help you identify the customers who get you the most revenue. This can help you improve your CLTV and lower the acquisition cost.
12. Omnichannel customer support
To improve your CLTV, build a strong omnichannel customer support system. An omnichannel customer support system may consist of email support, chatbots, phone support, social media support, and so on, depending on your customer’s preferences. However, remember to have strong support across each channel you choose.
13. Create useful content for customers
Create helpful content for your customers to address their pain points to engage with your customers. Creating engaging and valuable content for your customers helps you to interact with your one-time buyers and convert them into repeat customers. And the more purchases a customer makes, the more your CLTV value increases.
14. Pamper them on their special days
Sending out emails on birthdays and wedding anniversaries with a gift coupon or an exclusive discount are powerful marketing tools that tap into customer psychology and encourage them to make a purchase. These emails are engaging and nudge the customer to visit your product page if they haven’t done so recently. Anniversary emails are also easy to implement, help improve CLTVs, and are profitable.
To improve CLTV, brands must focus on improving the customer experience and engaging with them meaningfully and consistently. And to engage with customers and improve their experience in a positive way, it’s important to understand your customers better.
That’s where having a customer account page becomes important. Flits brings together all your customer data in one place, including store credits, recently viewed products, delivery addresses, wish lists, previous orders and more – while this makes it easier for online shoppers to make purchases, it also gives you more information on who your customers are.
Equipped with first hand insights and information on your customers, this enables you to create campaigns that are targeted at meaningful engagement across the funnel. Thereby, boosting the customer lifetime value.
Ready to take the first step to improving your CLTV?