It's always been easier to sell to an existing customer than it is to convince someone who's never heard of your ecommerce brand to buy from you. But retaining customers has become all the more important with increased customer acquisition costs and competition in the digital space.
One metric crucial to evaluating customer retention and identifying your most valuable customers is customer lifetime value (CLV).
We'll talk about exactly what CLV is, how it's calculated, and things you can do to boost your CLV.
What is customer lifetime value (CLV)?
Customer lifetime value is a metric that reflects a customer's value to a business. In other words, it's an estimate of how much revenue you can expect to generate from one customer over the course of their relationship with your company.
You can use CLV to make more informed decisions about where to allocate your resources for maximum impact. It can show you who your most loyal customers are so you can invest in those relationships more. It can show you your most profitable customer segments so you can focus your marketing efforts on acquiring customers with similar qualities. And it can help you identify your most valuable products by helping you uncover which products customers with high CLV are drawn to.
How to calculate customer lifetime value
There are a few different ways to calculate customer lifetime value, but for this blog post, we'll focus on the most common method: historical analysis.
You'll need to know your store's:
Average order value (AOV): How much customers spend on average, calculated by dividing the total revenue generated by all orders by the total number of orders.
Average purchase frequency: How often your customers typically purchase from you in a year, calculated by dividing the number of orders in a year by the number of customers.
Churn rate: The percentage of customers that stops shopping with you, calculated by dividing the sum of customers who purchased from you last year and this year by the number of customers who bought from you last year.
Average customer lifespan: How long a customer typically continues to purchase from you, calculated by dividing 1 by your churn rate percentage.
With these numbers, you can calculate CLV using this formula:
CLV = AOV * purchase frequency * average customer lifespan
For example, let's say your AOV is $100, your customers purchase from you an average of four times per year, and your churn rate is 80%. First, calculate your average customer lifespan. Dividing 1 by 0.8, we get 1.25 years.
Then, multiply according to the CLV formula. This would give you a CLV of $500.
While calculating CLV is relatively straightforward, it's important to remember that CLV is an estimate—it's more of a guide than anything else. But it's still a valuable metric to keep track of because it can give you insights into which marketing efforts are working and which ones aren't worth your time and money.
How to increase customer lifetime value
There are several ways to boost customer lifetime value. It all comes down to getting your customers to buy more in every order, shop more frequently, and stay with you as a customer for longer.
Invest in customer retention initiatives
If you want to increase your CLV, customer retention should be one of your top priorities. The longer shoppers remain customers of your business, the more they'll buy from you, naturally. And, after all, it's more expensive to acquire new customers than it is to keep an existing one.
There are many things you can do to retain customers, including:
Offer a customer loyalty program: Customers love being rewarded for their loyalty, so offer them an incentive to stick around. This could be in the form of a discount, early access to new products, or exclusive content.
Use email and SMS automation: Put your customer data to use and keep customers coming back with personalized post-purchase, cross-sell, replenishment, and winback flows in your email and text message marketing programs.
Provide a smooth returns experience: Offer a generous return policy and make it easy for customers to return items if they're unhappy with their purchase. If it's too hard to return an item, they're unlikely to buy from you again.
Segment your customers and target them with unique offers
Customer segmentation is the process of dividing your customer base into groups based on common characteristics. This is important because it allows you to tailor your marketing efforts to specific groups of people, which can be more effective than a one-size-fits-all approach.
You can segment customers using a variety of first-party data:
Demographics: Age, gender, location, etc.
Psychographics: Lifestyle, interests, values, etc.
Purchase history: First-time buyers, repeat buyers, high-value buyers, shoppers who have bought from a specific collection or product category, etc.
Then, you can target customers with unique offers that are relevant to their needs and interests. This makes them more likely to buy because you're marketing products they're likely to buy and in a way that resonates with them.
Increase the average order value
Another way to increase CLV is to get customers to spend more money each time they purchase from you.
You can offer incentives to buy more, like discounts and promotions based on a minimum cart value. Or you can upsell and cross-sell products to customers.
Upselling is when you encourage customers to buy a more expensive version of the product they're interested in. For example, if someone is looking at a less expensive pair of shoes on your site, you might suggest they buy a more expensive pair that's better quality.
Cross-selling is a marketing tactic to encourage customers to buy complementary products. For example, if someone is buying body wash, you might suggest they buy deodorant as well.
Get customers to purchase more often
Depending on your business and your customers' habits, you might have more luck increasing CLV by getting customers to purchase more often.
For example, say you release new collections of leggings in four new colorways on a regular basis. You notice that with every release, customers tend to choose one color from the collection. So you might increase the frequency of your launches to a few times per year to encourage customers to purchase more often.
Or, if you sell consumable goods like coffee or toothpaste, you might launch a subscription program to automate the purchasing process and get customers to buy more often.
If customers don't opt into a subscription program, you can consider sending automated replenishment reminders by text or email instead. These will remind customers to buy when they're likely running low on a product and encourage them to buy more.
Use SMS to boost customer lifetime value
Customer lifetime value is an essential metric to track for any ecommerce business because it tells you how much revenue a customer is expected to generate over their lifetime. Without knowing this number, it's difficult to make informed decisions about where to allocate your marketing budget and which customers are worth investing in.
Investing in SMS marketing as a core channel of your marketing strategy can help you boost your customer value.
You can use SMS for automated flows in your customer retention strategy, to keep customers up-to-date on their orders, and send campaigns for new products or sales.
You can even use two-way conversational texts to assist a customer in finding the right product, initiating a return, or chatting with customer service.
All these things will create a seamless customer experience that keeps customers coming back.
Learn how Emotive can make SMS marketing your next best revenue channel.