What is Lifetime Value?
Lifetime Value, or Customer Lifetime Value, estimates the lifetime net profit from every paying customer of your ecommerce store. While many store owners focus on measuring the acquisition cost of new buyers, identifying lifetime value gives businesses the ability to understand and predict how much each customer is actually worth.
How is it Calculated?
Online stores want to aim for high lifetime value and customer retention, which lowers the cost of acquisition and increases increases average order value. The most useful way to calculate lifetime value is with the following formula: Average Order Value x Number of Repeat Sales x Average Retention Time = Customer Lifetime Value You can calculate lifetime value based on historical data, taking the sum gross profit from all past purchases for an individual customer. However, a retrospective view doesn’t account for likely future customer behavior. By conducting a predictive analysis of lifetime value, you’ll be able to forecast the profitability of individual shoppers. Analyzing previous transactions with behavioral data points enables better marketing decisions and the ability to focus on customers that have a higher likelihood of being more profitable in the long run.
Increasing customer lifetime value and retention is proven to be a critical factor in profitability and growth:
- The probability of selling to an existing customer is 60-70% versus the likelihood of selling to a new prospect, which is 5-20%.
- A study of online shopping habits found a shopper’s fifth purchase at the same store was 40% larger than the first, and the 10th purchase was 80% larger than the first.
- Businesses with 40% repeat customers generated nearly 50% more revenue than similar businesses with 10% repeat customer base.
How is Customer Lifetime Value Different than a Transactional Approach?
Many online retailers analyze and invest in transactional customer value rather than focus on what happens after the conversion. While daily transactions are useful for tracking the short-term performance of your store, measuring lifetime value will give you a more balanced view of the health of your business and future success.
Putting Customer Lifetime Value into Action
The most value you can get with the lifetime value metric you calculate is to segment your customers.
Acquisition Channel: Segment CLV metrics by acquisition channel in order to see which channels deliver the most profitable customers and where your marketing dollars are best spent.
Demographics: Segmenting by demographics can help you target marketing campaigns to specific groups of people based on geography, age or other traits.
Actions Taken: Breaking down SLV by actions taken can help you determine which customer actions, such as a downloaded coupon or loyalty program sign up, have the most impact on lifetime value.
Long-Term Growth: Knowing which customers have the highest lifetime value can also help you determine where your online business should invest in growth and more accurately measure the long term profitability of new acquisition channels. Think of it as intelligence you can use to rethink your strategies and focus investments in a way that will increase customer value and profitability.
For specific strategies on increasing Customer Lifetime Value check out this guide. You can also learn more about Customer Lifetime Value here. As competition among ecommerce retailers continues to grow, it’s more important than ever to use lifetime value to understand buyer behavior and guide your business strategy toward growing a loyal customer base.