If you’re constantly thinking about Customer Lifetime Value, it means that you are on the right track; You’re monitoring one of the most important metrics in eCommerce.
As an indicator of the net profit generated throughout a relationship with a customer, CLV is influenced by various factors. From all metrics that you measure, 10 KPIs have a major impact on CLV:
- Customer Acquisition Cost
- Customer Retention Rate
- Purchase Frequency
- Average Days Between Transactions
- Cohort Stickiness Rate
- Net Promoter Score
- Customer Effort Score
- Time to First Response
- Time to Resolution
But before we get to these KPIs, let’s make sure we have the same CLV formula in mind.
Customer Lifetime Value is one of the most complex and insightful metrics you can measure and monitor. It tells you how healthy your business is and how good you are at constantly improving customer experience and satisfaction.
If you want to improve CLV, you must also be aware of:
- How much you spend acquiring new customers
- The profit your customers bring
- The buying habits and patterns
- How happy customers are with the experience you provide
- How agile you are at keeping customers satisfied and loyal in the long run.
Juliana Jackson draws attention to the need of understanding this important metric and use it correctly, so it brings value to your company:
“The never-ending increase in CPMs and CPCs plus the issues with data privacy and the extinction of 3rd party data has brought Customer Lifetime Value in the limelight as being the cure for eCommerce growth.
That statement does make sense in the happy scenario that the team that handles your growth understands CLV and its flaws (Yes, CLV is not perfect) and understands how to work with it.
In the wrong hands, CLV can become a quick kick in the ass.”
We recommend our eCommerce expert roundup on practical strategies to increase CLV to give you some ideas on how to use it for your online store.
Let’s dive into these 10 KPIs that help you improve CLV.
Customer Acquisition Cost
Without calculating CAC, you risk either acquiring leads that are too expensive or acquiring fewer customers than you actually afford.
Many companies fall into this trap when they evaluate their cost per conversion only by looking at the reports from Google or Facebook. When your focus is Customer Lifetime Value improvement, the data you get from these reports is not enough.
Customer Acquisition Cost is the most reliable metric if you want to:
- Calculate the real cost of acquiring new customers;
- Compare this cost with the entire value a customer brings to your company.
The formula for calculating CAC is this:
The sum of media cost, marketing tools, marketing wages, agency fees, overhead costs, all divided by the number of new customers acquired in the period you calculate for.
Brian Balfour, CEO of Reforge, previously VP Growth @ HubSpot, wrote in an article guested on Andrew Chen’s blog, that it’s important to separate new customers from returning customers for a more accurate CAC calculation. Also, Balfour said that you need to know exactly what marketing and sales expenses you’re going to include in the CAC formula so you can get an accurate value.
Now that you know the real cost of acquiring new customers, you can find the balance between CLV and CAC.
Customer Lifetime Value to Customer Acquisition Cost ratio (CLV to CAC ratio) shows you how profitable your business is.
A good CLV to CAC ratio is 2:1 and it means that your company is spending properly. However, it would help if you kept in mind the other costs your company has on top of CAC.
The most accurate figures result when you calculate CLV by the net margin.
In this case, the best CLV to CAC ratio is 3:1, meaning that you have enough cash flow to implement new big initiatives.
If your CLV to CAC ratio is below 2:1, it means your company is spending too much to acquire new customers unless you’re doing this on purpose, to gain marketing share.
Monitor Customer Acquisition Cost with Customer Lifetime Value in mind and you’ll get the most revealing insights about your company’s health.
Another hidden cost that many brands do not take into consideration is the “Cost to Service”. In short, the cost to service includes all the overhead costs your company pays to serve that customer.
Jason Greenwood has an episode dedicated to this metric and its influence over CLV’s accuracy, so play it if you want an in-depth look at the link between these two metrics:
Gross or net? What margin do you take into consideration when you calculate CLV? The values you get and the resources you invest will vary depending on it. We’ll show you why, but first, let’s look at the formulas for calculating gross and net margin.
The Gross Profit Margin is easy to calculate: you subtract the cost of goods sold from the total revenue.
To calculate Net Profit Margin, besides subtracting COGS from the total revenue, you also have to subtract the marketing & advertising costs, the general & administrative costs, the operational expenses, interest, depreciation.
If you want to know your profit margin after subtracting all costs from the total revenue, you need to calculate the Net Profit Margin.
Some companies calculate CLV based on Revenue, some based on Gross Margin, some on Net Margin.
Each alternative comes with its own challenges:
- Revenue – is easy to calculate, but not so accurate when it comes to capturing profitability.
- Gross Margin – is not that hard to calculate and monitor, but it’s pretty accurate and actionable
- Net Margin – is the hardest to calculate and monitor long-term, but it’s the most accurate.
A lot of eCommerce marketers would go with the net profit margin, but it takes a lot of effort to recalculate it manually each month or quarter. This is why we see companies that are switching to tools that help them calculate CLV automatically based on the data already captured by the eCommerce platforms.
Customer Retention Rate
There’s a lot of confusion over retention rate and repeat purchase rate, as Juliana Jackson emphasizes:
“BEWARE of a big mistake most brands make when it comes to their Retention Rate. They mistake it with Repeat Purchase Rate mostly because of all the classic eCommerce platforms such as Shopify or Klaviyo that are not focused on retention metrics. These tools focus on sales metrics to prove their technology ROI. So, instead of showing retention rates, they show repeat purchase rates. Which is a totally different metric.”
The Repeat Purchase Rate represents the percentage of customers that come back to your store for a new purchase, while the Customer Retention Rate measures the number of customers that you retain over a given period.
Before you calculate CLV, you must know your Customer Lifespan (CL), which you can’t calculate without knowing your Customer Retention Rate (CCR).
CCR helps you monitor how good your company is at convincing customers to buy from you again.
The formula for CCR is simple: you divide the number of customers that placed two or more orders by the total number of customers, considering the same period.
Many factors can influence the retention rate, so you should measure how CCR varies in time.
Your business is heavily relying on returning customers. If you see a clear downward trend, you must find the source of your problem ASAP before losing valuable customers.
Along with calculating retention rates, you can also keep an eye on the retention curve. It tells you after how many orders your customers become engaged and develop the habit of ordering from your store.
The purchase frequency allows you to measure the number of times your customers purchase in a given period.
The purchase frequency value varies a lot depending on the industry, consumption patterns, company size by customer count.
If you want to benchmark against the average value in your industry or other competitors the same size as you, you can always check the Real-Time CLV Benchmark Report that is 100% free and ungated.
Purchase frequency has a direct impact on CLV, so look for ways to increase its value. It all starts with a clear onboarding process and depends on creating meaningful experiences for your customers.
Average Days Between Transactions
The Average Days Between Transactions is easy to understand and calculate and a metric that helps you adjust your onboarding program to the buying cycles.
The formula is simple:
ADBT = (date of the last order – date of the first order)/ (Total # of orders – 1)
Let’s take a look at the example above. The ADBT is 12.5 days, so the company could send a reminder on the 9th or 10th day, right before the customer is expected to place another order.
Identifying ADBT for your customers can help you increase the purchase frequency by sending the right messages, at the right time. A higher purchase frequency will have a direct impact on CLV, so ADBT is one of the most important metrics to count on when adjusting your onboarding programs.
In the Real-Time CLV Benchmark Report, you can also find the ADBT values by industry but keep in mind that your ADBT is highly influenced by how your customers consume your products and services.
Cohort Stickiness Rate
A cohort is a group of customers that share the same characteristics. The most common cohorts are time-based.
The 2nd-month cohort stickiness rate is the percentage of customers/ revenue/ orders that are being realized in the 2nd month after the initial purchase.
If you’re looking at the report below, you can see that the company generated the most sticky customers in March 2020. The next thing they could do is analyze what campaigns generated these new customers and find parts that can be replicated to attract more sticky clients.
NOTE: The second-month stickiness only makes sense if you are selling products that have a high frequency. It’s not a relevant metric for brands that sell products that do not require replenishments or you have a limited number of SKUs that do not complement each other – can be sold together.
Net Promoter Score
Measuring CLV helps you know how much money a customer brings throughout their entire lifespan. If you want to improve CLV, you need to improve the relations between your company and your customers.
To do that, you must find what you’re doing right or wrong from a customer’s perspective. One way to collect feedback directly from your customers is by sending them NPS surveys.
NPS stands for Net Promoter Score and it is a metric that allows you to predict future customer intent. The most common NPS question is “On a scale from 1 to 10, how likely are you to recommend our product/ company to your friends and family?”
Based on the scores you receive, you will know how many of your customers are promoters (customers that are very satisfied with their experience), passives (customers that are satisfied but are not as hyped as promoters are), and detractors (customers that are unhappy and can affect your brand reputation if you choose to do nothing about them).
Monitoring this metric by segment helps you keep track of how happy your most valuable and loyal customers are so that you can act in real-time if necessary. Preventing customer churn is key when your goal is to increase CLV.
Customer Effort Score
Customer Effort Score is a type of customer satisfaction survey that helps you measure the ease of service experience with a company. You can ask customers to rate the ease of placing an order, buying from your shop, use or return your products.
Remember that, when it comes to customer satisfaction surveys, the worst thing a company can do is ignore the complaints and problems signaled by its customers.
Time to First Response
Time to first response reflects the number of minutes (or hours) elapsed between the time a customer submits a ticket and the time a customer service rep responds to the customer.
Customers that come to you because there’s an issue you must solve need immediate reassurance. They prefer a brief confirmation that you’re looking into their problem instead of doing nothing or writing a delayed message. A good first response time helps you avoid dissatisfied customers and losing them because you failed to show you care about them.
Time to Resolution
Time to resolution shows you the average amount of time a customer service team needs to resolve a customer service issue, case, or ticket once it’s been opened.
Time to resolution is also called mean time to resolution (MTTR) or resolution time.
Typically, this metric is measured in business hours, not clock hours, to compensate for customer service organization downtime.
There’s a direct correlation between customer satisfaction and Customer Lifetime Value.
That’s why you need to track metrics related to customer satisfaction, especially if qualitative research reveals that your main CLV barrier is the customer experience, not the products.
There’s more to explore about the 10 KPIs presented in this article. If you want a more strategic approach to CLV and the metrics that impact it, you can start watching the lessons in our course on Customer Value Optimization.
And, if you can’t stop wondering how other eCommerce businesses are doing, you can always check the Real-Time CLV Benchmark Report. There you can see aggregated data from over 1500 online stores that use REVEAL to calculate and monitor the most important metrics for their business.
When you start monitoring these 10 KPIs, make sure you choose an effective alternative that allows you to check them constantly. You’re in a very dynamic business and things change faster than you sometimes want. Keep an eye on them & keep up the good work.
Frequently asked questions
Customer lifetime value (CLTV) is a metric that helps businesses understand the total amount of revenue they can expect to earn from a customer over the course of their relationship. To measure customer lifetime value, businesses typically start by calculating the average value of a customer purchase, and then multiply that by the average number of purchases the customer is expected to make over their lifetime.
There are several key performance indicators (KPIs) that businesses can use to measure customer lifetime value (CLTV). One common KPI for CLTV is the ratio of customer lifetime value to customer acquisition cost (CLTV:CAC). This metric compares the total revenue earned from a customer over their lifetime to the cost of acquiring that customer, providing a measure of the return on investment (ROI) for customer acquisition.
CLV can vary among different customer segments based on factors such as purchasing behavior, demographics, geographic location, and product preferences. It’s important to analyze CLV within specific segments to tailor marketing and customer management strategies accordingly.
There are various methods to calculate CLV, including the historic CLV, predictive CLV, and cohort-based CLV. These calculations typically involve analyzing customer purchase history, revenue data, retention rates, and average customer lifespan.