Is your online store successful or not?
You probably know about all the E-commerce KPIs; rolling many orders may give you a great feeling of accomplishment, but what metric does it best help you see the clients’ worth and your actual ROI?
One of the most useful calculations in E-commerce that responds to above questions with accuracy is Customer Lifetime Value. To bring up great insights, I’ve assembled in this article some simple sketches regarding CLV.
You’ll be able to have a good picture with most important factors in determining your online business’ present and future success.Some are basic math algebra. Some are pieces of business intelligence. Others are tips to increase factors determining long-term “awesome” clients. And others are just ways to look into the data, so you know how to steer the focus. But they’re all in here.
As the term implies, the customer lifetime value represents the total amount of money that a particular customer is likely to spend over his or her lifetime relationship on your website.
Why on Earth is Customer Lifetime Value so important?
Well, when managers put CLV into action, they can derive actionable information enabling them to design customer strategies that really matter in the long-run, rather than focusing on short-term profits. As it is significant, CLV provides the following crucial insights:
- It can act as a benchmark for future growth and expansion
- It can act as an indicator for business growth goals
- It demonstrates the significance of repeat business& can help managers shift priorities accordingly
- If we tweak the computations we can figure out a customer lifetime gross margin, costs and other metrics by substituting them (on an average basis) in place of the average order value (AOV)
- Is helpful to the business owner or CEO as they develop effective strategies for
- Acquisition
- Advertising and marketing targeting
- ROI
- Retention efforts
- Individual-customer profitability
- Company profitability/valuation
- An excellent aid to determine the value of your business for the situations when you wish to seek outside funding, sell your company or just simply borrow money.
With Customer Lifetime Value you’re actually learning what your average customer is “worth” to your company and this can be a powerful piece of business intelligence to enhance retention and boost revenue if used wisely.
It is natural to wish for maximum profits with minimum costs, as any company has only limited resources. Such an investment can be made when you know exactly the cumulative cash-flow a particular customer would give you throughout his/her lifetime relationship on your website.
First, you recognize your most profitable customers using CLV, then you can optimize the allocation of your resources by adapting also the marketing strategy to specific audiences.
Whenever the win-win situation ceases to be balanced, meaning there are no mutual benefits for the parties involved, the relationship begins to be shaky.Therefore it is utterly important to make valuable the relationships that you have with your most “worthwhile” customers.You activate retention focus, achieving at the same time your financial objectives.
“Rather than thinking about how you can acquire a lot of customers and how cheaply you can do so,” one marketing guide observes, “CLV helps you think about how to optimize your acquisition spending for maximum value rather than minimum cost.”
Customer Lifetime Value in use
The infographic from KISSmetrics regarding the CLV/ LTV of a Starbucks customer breaks down every step of the formula.
The first step shows how to average your first variable, the average sale. The next is the number of visits per week, or the number of repeat sales. When these averages are plugged into the formula and a time supplied, we can see the lifetime value of that customer for the particular time given. In the case of the infographic, the time value supplied is one week.
Let’s take another example I’ve found very well put.
You have a customer with CLV of $60K. If it cost you $15K a year to service this customer and it cost $20K to acquire this customer.
How long do you want to keep this customer? Obviously, no more than 3 years or you’ll only be breaking even and starting to lose money. Understanding this type of data helps a company be much more profitable and also helps to define the ideal customers for the marketing and sales team to focus on.
Of course, it can be complex to put together these expenses on an individual basis.
Attributing certain costs to an individual customer is often problematic. When in doubt, use average to estimate until you can properly track expenses individually. Now considering we have the profit in mind and a customer that generates 1000$ as net margin during its lifetime. I bet you wouldn’t like to have 1000$ acquisition cost per new customer, right? You should earmark around 10% or 100$ towards acquisition cost.
10 tips to increase Customer Lifetime Value
We now move forward to finding 10 great tips to help increase the Customer Lifetime Value and bring it to the maximum potential. So here they are:
#1 Increase Customer Satisfaction
#2 Innovate
#3 Make use of your data smart and optimize
#4 Segment your customers
#5 Find the Right Customers for your business
#6 Personalise and Customise
#7 Up sell and Cross-sell
#8 Keep your Cost per Acquisition as low as possible
#9 Create many engagement points with the customer
#10 Create great loyalty programs with true benefits for the customer
The most important thing to consider when speaking about CLV is the fact that customer satisfaction plays a huge role. The better the customer satisfaction, the higher the lifetime value of each customer. The poorer customer service, the larger negative impact on CLV. This is common sense, but it’s a challenge whenever the business scales up.
So, to increase the customer satisfaction you really should know something about your own customers, who they are, if they are a good fit for what you sell, how you should segment them in order to have a proper view and analysis on them and then you’ll be ready to start thinking about how you could bring added value.
Successful innovations make customers more valuable. That’s as true for Amazon, Alibaba, and Apple as for Facebook, Google, and Netflix. No one would dare argue that these innovators don’t understand, appreciate, or practice a CLV sensibility. Michael Schrage says in a Harvard Business review article that delighting customers and meeting their needs remain important, but are not enough for a lifetime.
That is why innovation must be seen as an investment in the human capital and capabilities of customers.
Consequently, serious customer lifetime value metrics should measure how effectively innovation investment increases customer health and wealth. He gives a great value sentence Ask people to complete this sentence: ”Our customers become much more valuable when…” and from the discussions had with several employees in different companies, it doesn’t take long before the answers start to incorporate an investment ethos that sees customers more as value-creating partners than as value-extraction targets.
By investing in and enabling new customer capabilities, firms create new ways for customers to increase their lifetime value.
Making customers better truly does make for better customers.
Kissmetrics points to the 70% return-visitor rate that Disney Parks achieve, and points to Disney’s commitment to “constant and never-ending optimization” as the key to keeping customers coming back for more. The best investment you can make in measuring customer lifetime value is to make sure you’re investing in your customers’ lifetime value.
Customer Lifetime Value (CLV) in E-commerce
CLV is the single most important metric for measuring gross profit and success over time. In digital marketing, it gained prominence with the rise of software-as-a-service but quickly found its way into eCommerce as well. The most expensive endeavor for eCommerce businesses is generating new customers.
Customer acquisition can be cost prohibitive, and returns are often difficult to forecast. CLV attempts to answer that question. Knowing the CLV of a customer will help you get the ideal balance between customer retention and acquisition. Knowing at what point a customer becomes profitable, is an essential part of knowing how much budget you can allocate to a particular channel or market.
Additionally, CLV provides real insights into your customer retention strategy. A steadily climbing average CLV shows that your retention and up-selling efforts are paying off and having a real effect on your customer’s chances of returning.
Customer Lifetime Value in SaaS
To measure lifetime value for a subscription business we need to use three variables:
- ARPA (Average Revenue per Account)= MRR/ Total # of customers
- % MRR Churn Rate = Churned MRR / Last Month’s Ending MRR
- % Gross margin= Revenue – COGS / Revenue
Improving your Customer Lifetime Value can have dramatic impacts throughout your business.
So you should always be looking for higher ARPA (customers paying you more money), higher Gross Margin (costing less to produce) and lower Churn Rate (paying you for a longer time).
I guess you’re wondering what’s an acceptable Churn Rate and when should you be worried about it. I’ll give you some indications from saasmetrics where it is explained that it depends on 2 factors : your target customers and your company’s size/moment. Keep in mind that – if you’re doing a good job – your churn rate tend to drop over the time, so the bellow references should be considered for companies around 2 years old.
Very Small Business
If you’re selling to in selling to VSBs (very small business) even the most valuable services will churn at a significant rate no matter what. Unlike large companies, a VSB will have very little up-sell opportunities unless the company itself grows, and many will go under or change business direction.
Small and Medium Business
If your selling to SMBs (small and medium business) an acceptable churn rate reference would be around 3-5% monthly, but you really should target zero or negative churn. Another good reference would be < 10% annually for more healthy business.
Enterprise Level
If your targeting big corps with tickets higher than 5-digit/month your churn rate should be under 1% and going down proportionally to your revenue growth. Enterprise SaaS is only a success if you are adding more net revenue from larger customers each year than you had the year before. Now that you have the lifetime value of a customer, you can turn your attention to calculating how much you spend acquiring a customer.
An ideal CLV:CAC ratio should be 3:1
The value of a customer should be three times more than the cost of acquiring them.
If the ratio is close i.e.1:1, you are spending too much. If it’s 5:1, you are spending too little. In fact, you are probably missing out on business. It sounds straightforward and it is. But the fact remains, you need to know these numbers.
In David Skok’s post, he says that the Cost of Lifetime Value should be about 3 times the Cost of a client’s acquisition for a viable SaaS or other forms of recurring revenue model. Most of the public companies like Salesforce.com, ConstantContact, etc. have multiples that are more like 5x CAC. Also, CAC should be recovered in less than 12 months, for subscription businesses. Using all the explanations above, an E-commerce manager or SaaS entrepreneur can compute their metrics at any time.
The more you look at your data from a different perspective, the more competitive your business becomes, as insights help you read, predict, monitor and take advantage of market dynamics faster than others.
Omniconvert helps out to better understand your buyers and optimize your conversion rate at the same time, by looking into your data and getting the whole picture with less effort. Consequently, if you find out the pain points, the strategy reveals easily in order not only to convert more but also to retain more of your visitors and clients.
While working with large E-commerce players in several verticals, from Avon to OLX or Telekom, at Omniconvert we’ve always taken data very seriously and we’ve put it in different types of metrics for confirming successful paths to conversion optimization, as well as retention.
Therefore, we’ve done this thorough work for our client audits, but now we’re developing an awesome tool to share this type of knowledge by making it more accessible.
It will come in the form of an Omniconvert Magento Plugin, through which we’ll be able to have a deeper view of complex KPIs, showing a clear and smart picture of your data.
What rocks real nice about it, is that Customer Lifetime Value for example, shall be calculated taking into consideration specific factors of your E-commerce business and there will also be available cohort analysis, revenues structure, illustrative graphs coming with it.
Stay tuned, I’m sure you’ll appreciate such a dashboard 🙂
In conclusion, dare to dive into your data deeper, to make a difference on your market and be close to your clients, in every possible way!
