Think about the last time you went online to make a purchase. No matter what you were looking for, there were at least ten brands to choose from. Each one offers a competitive deal. Each one trying to entice you with an offer that’s hard to say no to. So what do you do? How many times do you choose the same brand you bought from the last time when you’re constantly being offered something better?
Your customers are no different.
Given a choice, they’d like to explore new brands and the rising competition has turned consumer attention into its own battleground.
Now, setting up ads on social media and search are great strategies to acquire new customers. But the real growth hack here is identifying and retaining your existing customers. After all, increasing customer retention by just 5% can boost your profits by 25% to 95%. And successful online businesses report 65% of their business coming from existing customers.
But how do you know whether you should be focusing on acquiring new customers or retaining existing ones?
By calculating the one metric you’ve probably been ignoring – your customer lifetime value.
What is customer lifetime value?
The lifetime value of a customer is the total amount of money a customer is expected to spend on your store (or in your business), during their lifetime. In a bigger picture, the customer lifetime value is a measure of the profit that is associated with the relationship to a customer.
For example, the CLV of a luxury bag shopper could be $8000. A bag that they invest in once and lasts for at least a few years – consider the typical Louis Vuitton bags in this case. Now someone who’s a regular with coffee might actually have a higher CLV based on how many time they purchase coffee from your store in a month. It could be twice as high as the CLV of the luxury bag shopper, considering the customer will buy packs of coffee from you at least twice a month to keep the stock going!
The customer lifetime value is considered an important metric in eCommerce because it helps make decisions about how many resources you should be investing in acquiring new customers. It also is indicative of how many resources you should set aside to implement strategies for retaining existing ones.
Why is the customer lifetime value important?
You’re keeping track of the new and returning visitors to your store. You’re also keeping track of the number of repeat purchases that are being made. In addition to that, you’re probably keeping a tab on the spend on each marketing and advertising channel, along with the ROI. So why should you be adding another eCommerce metric to your list?
Here’s why customer lifetime value needs to become a part of your regular performance reports:
1. It is indicative of how good your products are
If your customer lifetime value is low, there can be two problems with what you sell. Either your customers don’t find the product worth the value or they don’t know how to use the product properly. In both cases, you won’t see these customers coming back like the coffee buyer.
In case this number is low, you need to start working on gathering customer feedback. You need to know why your products don’t seem to be performing. The reasons could vary – it could simply be about understanding how to use the product, or maybe your marketing overpromising results.
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2. It shows you how strong your customer relationships are
Think about Walmart for a minute. Consumers who have been buying from them since the beginning of time, are still loyal to it. They speak of their customer service proactively and recommend shopping from there as well. That’s because the relationship they’ve built with their customers is strong.
CLTV is indicative of how engaged customers are with your brand. If this metric is dipping, you can be sure that the customer is never coming back for another purchase – even if they’ve made a high-value purchase earlier. Again, consider the example we’d started with!
3. It helps you plan your marketing budgets for new and returning customers
Most consumers tend to make a luxury purchase once a year. But a coffee consumer is more likely to make a purchase over and over again.
In the first case, you should be focusing on attracting new customers. But in the second case, you should be focusing on retaining the customer by keeping them engaged. So your marketing budgets should be more tipped towards customer retention strategies.
So basically if your CLTV is high, your marketing budgets should be more geared towards retention.
4. It enables you to discover your most valuable customers
Not every shopper will turn into a repeat customer. You need to identify those who are actively engaging with your brand to understand who the most valuable customers are. For that, you need to know who they are, what they look like and what their purchase behaviour is.
If a customer has a high CLTV, you need to focus on tailoring their shopping experience with personalization. Offering exclusive discounts, nudging them to make referrals and even requesting them to join your loyalty program. The metric basically lets you know who to focus on, when and how.
5. It helps you price your products better for higher profit margins
Customer loyalty does not come from discounts. Discount shoppers are usually those who’ll move from brand to brand simply based on how much they can save. Customers that you acquire by offering discounts, typically have a low CLV.
So if your CLV is too low, you know your brand image is tipping towards someone who is always offering discounts because the products are not good enough. Or even worse, no one’s buying from you. If the CLV is high, you know that your customers are not seeking discounts. They’re seeking quality and may also be more willing to spend more, letting you get more profit margins.
How to calculate the CLV?
Now CLTV isn’t going to pop up on your analytics dashboard just like that. But there are a few eCommerce metrics that you’re probably already seeing on your dashboard, that will help you calculate your customer lifetime value.
Metrics you need to calculate CLTV
So to get started with calculating the CLTV, here are a few numbers you need to get in place:
1. Average number of monthly transactions
Calculate the total value of all the transactions made on your store over a defined period of time. Then, divide it by the number of transactions or sales made during that period. You can calculate this metric on a daily, weekly, monthly or annual basis for actionables.
2. Average amount spent per transaction
Take a look at the total number of transactions made on your store over a defined period of time. Then total the amount of revenue you generated from these transactions. Divide the revenue by the number of transactions to find the average amount a typical customer is spending on your store.
3. Average number of months your customers remain loyal
Take a look at the number of repeat customers on your store. Create a separate segment to analyse the behaviour of these customers. Now, identify the number of months these customers continue to engage with your store and make purchases. Divide the two numbers to find the average amount of time these customers tend to remain loyal to your brand.
4. Average gross margin
To calculate this metric, you need to total the revenue you have generated over a defined period of time and then subtract it by the cost of the goods sold. Divide the number by the total revenue and you will have your average gross margin. To get a percentage of the margin you’re making on sales, multiple the number by 100.
Calculating customer lifetime value (CLTV)
Now that you have all metrics, here’s how you move on to calculating the customer lifetime value. Here’s a simple and effective formula to keep at the core of your analysis:
CLTV = (average amount spent per transaction) x (number of times a customer purchases from you in a year) x (average number of months they continue to buy from you (in years))
To give you a better context of this calculation, here’s how you would calculate the CLTV of the coffee buyer:
CLTV = $100 per purchase x 48 packets per year x 3 years = $14,400
And for the luxury shopper, here’s what the CLTV looks like:
CLTV = $5000 per purchase x 1 purchase per year x 1 year = $5000
See what we mean? The focus on the value of CLTV, of course, varies from brand to brand, and industry to industry.
[BONUS] Identifying your loyal and VIP customers with customer analytics and segments
While the above calculations are a must, it’s also important to move fast in a competitive sphere. To get to your high-value, high-CLTV customers, you need to be able to identify your loyal and VIP customers sooner.
This is where plugging in an eCommerce analytics solution comes into play. Analytics solutions like RevTap connect with your marketing tools and analytics apps, to bring all your data onto one dashboard. Using machine learning algorithms, it then processes this data and creates customer segments based on purchase behaviour, average amount customers spend on your store, number of purchases made and other parameters.
With clear segmentation, you’re able to identify your VIP and loyal customers almost instantly. So while you calculate the CLTV of these customers, you can already start to implement retention strategies for this segment and not let them step away from your brand!
Here’s a glimpse at what customer analytics and segments can uncover for your business:
We call it a growth hack to calculate your CLTV faster so that you don’t miss out on any repeat customer opportunity.
Now if your CLTV across your list of customers seems to be at an all-time low, it’s time to get to work.
How do you improve your customer lifetime value (CLTV)
A low CLTV means you’re losing customers to competitors faster than you think. You might not be seeing the impact on your weekly sales reports, but it all comes back to you when the annual report hits the desk. So here are some strategies you need to implement right from the start to achieve a high customer lifetime value (CLTV).
1. Improve the online shopping journey for the customers
Right from the point, a shopper lands on your store to them browsing through products, adding them to the cart and then making a purchase, every little detail can make or break a sale. So make sure the shopping journey on your site is optimized for high conversions. Which means you need to look into your website conversion funnel and identify how many shoppers tend to drop off mid-way.
This will help you analyse the challenges a shopper may be facing at that stage in the purchase cycle, and optimize it for ease of buying. You can dig deep into Google Analytics to see how shoppers tend to interact with your store, analysing all your site links, or you can get an eCommerce analytics solution to condense this information for you in the following manner:
2. Provide value-packed content
Start focusing on what you present to the buyer on your product pages. Instead of just a list of features, try including the benefits they will see from the purchase and why they should be choosing you. Adding a storyline that helps them visualise the value of the product, is even better!
The second way of providing value-packed content is by using content marketing. Create content pieces like blogs, lookbooks, how-to videos and more to help customers get a virtual look and feel of the product.
Here’s an example from ProFlowers:
3. High-end customer service and omnichannel support
Unlike brick and mortar stores, online shoppers are mostly on their own as they browse through your online site. They feel the need to verify information about a product more closely before making a purchase as they don’t want to go through a return, refund or exchange process. And even if they do, they want it to be easy.
That’s where customer service and omnichannel support comes in. Establishing multiple touchpoints to let shoppers easily get in touch with you, helps you address concerns about a product and help them make an informed purchase decision. An informed purchase means that they’re happier with the product they buy, and hence the CLTV is more.
Similarly, if they are able to easily request a return/ refund/ exchange from any of the touchpoints, they know that your brand is focused on adding value to them. This too, improves your CLTV in the long run as they start to trust you more.
You can do this by implementing live chats on your store, providing more information on purchase policies, setting up social media accounts for easy touch base and also providing an email address they can reach out on.
4. Focus on building relationships and a community
Instead of simply offering discounts at different stages, focus on building a strong relationship with your customer. Show them the value they bring to your brand instead of making them feel it’s a one-way street. You can do this in two ways.
One, you become absolutely transparent about pricing, shipping costs etc by offering that information up front. Two, you build a community that feels growing your brand is as much their responsibility! Here’s an example from H&M, featuring their customers on their Instagram handle, showing them how their style defines the success of their collections.
5. Collect actionable feedback
Instead of just asking for ratings and reviews, go one step ahead and ask for feedback. Let it come in brutal. Ask them how they feel about your products and the overall customer experience your online store offers to them.
There are a few moments at which the customer is more likely to share feedback that you can use to improve the experience for them. One, when they complete a purchase. Two, when they receive the order. Three, when they have spent some time using the product. Make sure you tap into each moment to know what your customers feel.
6. Detect pain points and address them
Using the feedback you get from customers, identify the common pain points across different customer segments.
It could be little things like not being able to assemble the product as easily as shown on the site. Or it could be the order delivery experience in general. Either way, you want to know what might impact their decision to come back or not, to your store.
Make sure you prevent all leaks by addressing these pain points. Sometimes all it takes is following up a purchase with a personalized call to help them use the products better!
7. Offer a personalized shopping experience
What’s the one thing that makes you want to go back to H&M time and again? The personalized shopping experience the store has to offer by displaying product recommendations that are tailored to suit your interests.
So when you go looking for a t-shirt, it recommends a set of other products that would complement your purchase and add more value to you. In most cases, you often end up checking out with more than just a t-shirt because of the tailored experience you get on their site.
Here’s what we mean:
8. Encourage customers to subscribe to products
If there are products on your store that customers may need on a recurring basis, encourage them to opt for a subscription model. You can entice them into making this commitment by offering a collective discount on the subscription.
Following this strategy is like securing the sales on a said product in the coming time. But you also need to ensure that it is easy for the customers to unsubscribe.
Even Amazon uses this strategy to boost their customer lifetime value clv!
9. Upsell and cross-sell
Don’t keep waiting for a customer to come back to your store on their own. Sometimes a little nudge can go a long way. Using their previous interaction data and purchase data, upsell and cross-sell products to them that they are more likely to convert on.
The idea is to continually introduce them to better products from what they have purchased or other product ranges on your store.
10. Set up a rewards and loyalty program
Another way to ensure that a customer keeps coming back to your brand is to offer them some value in turn. They should see a reason or a clear motivation to come back to your store even when there are other offers on the table.
Setting a rewards and loyalty program acts as a motivator for repeat purchases. A customer gets to earn store credits or points that they can redeem in the next purchase, making it more lucrative to stick to one brand.
11. Ensure a great post-purchase experience with easy tracking and communication
A good online shopping journey does not end at the completion of a transaction. It begins there because there is still a time gap between the customer placing an order and actually receiving the product.
Most online shoppers have order anxiety. This refers to them endlessly waiting for the products to arrive, wanting to track the order status and wanting to ensure that it reaches them at the time they’re available. Typically stores provide customers with a waybill number that they need to use on the logistics provider’s site to track their order, which increases the number of steps that need to be taken to simply know their order status, ruining the customer experience. And eventually, your customer lifetime value.
This is where setting up branded order tracking pages and automating order status notifications come into play.
Should you be focusing on the customer lifetime value?
No matter what stage your store is at, the answer is YES.
In a competitive market, where a typical shopper has the choice of purchasing the same product from ten different brands, you need to pay close attention to this metric.
As it gets more difficult to capture consumer interest and acquire them as customers, it’s important to know if the investment is worth it and who you should be focusing on. The real growth hack that successful eCommerce brands make use of is knowing when to reach out to new customers and when to focus on driving repeat purchases from existing customers who display a high CLTV.
Vanhishikha Bhargava is the Head of Content and Partnerships at RevTap. You will always find her looking into ways to simplify technology for online merchants and eCommerce business owners, to help them increase their conversions and sales. She is also the Founder of Contensify, a content marketing agency for SaaS startups. You can connect with her on LinkedIn here.