Hunting down new customers because current ones are dropping like flies isn’t a sustainable strategy for eCommerce businesses (and neither is just focusing on current customers without growing your customer base).
Instead, the focus should be on improving customer lifetime value.
But, how do you know if your methods and strategies are enough to keep your customers around for the long haul?
That’s what we’re here for.
In this article, we’ll go over some commonly asked questions about customer lifetime value and give you some proven strategies to help improve it for the success of your eCommerce business.
Customer lifetime value FAQ
Before we get into our strategies, let’s answer some frequently asked questions about customer lifetime value.
What’s customer lifetime value?
Customer lifetime value (CLV) shows how much revenue a business can expect from one customer compared to how long the company predicts that customer will stay.
This business metric is invaluable to eCommerce businesses because it reveals how much companies can expect to generate throughout a customer relationship (the longer a customer sticks around and continues purchasing, the greater their value becomes).
How do you calculate customer lifetime value?
There are all kinds of formulas for calculating CLV, and the formula you choose will depend on your business and what you need to know (i.e. a SaaS company might use a different formula than a fashion label).
For the sake of simplicity, here’s a simple formula for calculating CLV:
First, calculate the average purchase value and multiply your result by the average purchase frequency rate — that number reflects your customer value.
Next, you’ll need to average the years a customer continuously purchases from your company — that number reflects your average customer lifespan.
Then to calculate CLV, multiply your two results (average customer lifespan and customer value) — that’s the revenue you can expect an average customer to generate for your business.
You can take CLV even further by segmenting customers into different buckets like Not Profitable, Profitable, and Highly Profitable, for example.
Why is CLV important and how can it help my eCommerce business succeed?
CLV is one of the most important metrics to measure because the higher the number, the greater the revenue.
Understanding your customers’ buying habits gives you a clear picture as to what they consistently spend their money on so you can tailor your marketing and offerings to encourage them to continue spending now and in the future.
5 reasons CLV is important:
- CLV helps you determine whether or not you can scale your business. Your CLV should be significantly greater (at least 3 times greater) than your customer acquisition cost (CAC) if you’re planning on scaling your business.
- CLV gives you a clear look at your retention efforts. A low CLV is a clear indicator that your customer retention strategy isn’t working or needs to improve. It also indicates how loyal a customer is and how likely they are to split if the economy takes a turn for the worse.
- CLV helps you determine your marketing ROI. Comparing your CLV to your CAC will reveal your marketing ROI. A low ratio of the two is an indicator of a low ROI.
- CLV helps you compare yourself to other businesses. Knowing your CLV gives you a better idea of how your business is performing compared to industry averages.
- CLV helps you deliver more value. When you understand what makes a customer continue buying from you, you’re able to deliver more value and increase customer loyalty.
Let’s explore this even further.
Imagine you own a jewelry eCommerce company and you’ve recently seen your revenue start to decline.
You’ve done the math and have determined that your CLV is only 2 times greater than your CAC, but it used to be 4 times greater.
You know something is off so you take a look at your company’s retention strategy and notice there’s a flaw in your retention program — customers aren’t getting welcome emails, confirmation emails, or emails about loyalty program discounts and offers.
You also notice a ton of complaints over the last 90 days and the majority of them are about gemstone clarity problems and overhead miscommunication.
You meet with your department heads to go over the issues and come up with a game plan.
Your marketing supervisor informs you that he switched to a new bulk mass email provider 90 days ago and your gemstone acquisition specialist says she switched to a new wholesale gemstone distributor around the same time.
At this point, you decide it’s best to find a new gemstone quality control specialist since they didn’t notice the errors when inspecting the gems before approving them to be shipped to customers.
You also decide to switch back to your previous bulk mass email provider and wholesale gemstone distributor until you can find ones that better fit your company’s needs.
You might also want to invest in a custom software solution to fix your issues that led to miscommunication and prevent it from happening again.
Next, you meet with your customer service team and PR department to discuss a plan to reach out to all customers to solve customer complaints and entice customers to come back or stick around with a significant discount or free gift.
And that’s why CLV is critical for the success of your eCommerce business — it gives you incredible insights to see what’s working and what’s not. CLV can ultimately make or break your business.
5 Proven strategies to improve CLV for eCommerce businesses
Now that we’ve covered the nitty-gritty about CLV, let’s get into those strategies we promised.
Here are our top five strategies to help you improve CLV for your eCommerce business:
1. Focus on delivering immense value
The value a customer brings to your business over their lifetime as a customer is directly correlated to the value your business brings to the customer. This creates the value chain — where value creation is conceived for both the customer and shareholders.
While a supply chain refers to the steps it takes to get a product or service to a customer, a value chain refers to adding value to raw materials to produce products and services for its customers. (In other words, supply chains influence overall customer satisfaction while value chains give companies a competitive edge.)
The value chain is broken up into 5 steps: inbound logistics, operations, outbound logistics, marketing and sales, and service.
The focus is on maximizing value during each step.
To support the value chain, you’ll also need to take a look at procurement, technology development, human resource management, and data infrastructure to see where your business might be vulnerable to a value chain disruption like in the chart below:
The sequence in the value chain starts from the original request and moves through the chain until it ends at the final product.
In the end, a profitable value chain has a seamless connection between what consumers expect and what a company gives them.
Make sure to prioritize things like customer surveys, product testing, fresh and clean design, innovation, research and development, and marketing. These will give you clear indicators of what your customers consider valuable so you can work together to receive value on both ends.
2. Send personalized emails
To increase CLV, it’s important to send relevant personalized emails — but that doesn’t mean stressing over sending a hyper personalized email to every customer. It just means collecting enough information about them to prompt them to take a relevant action based on an action they’ve recently taken on your social media, email, or website.
For example, let’s say the customer was looking at your latest Spring collection on your website and was about to make a purchase, but didn’t. You can set up automations to contact that customer by email or social media encouraging them to finish their purchase.
Take a look at this email from Tarte Cosmetics:
In this example, Tarte sent an email with a subject line that reads ‘25% off your cart ends tonight’ enticing the customer to complete their purchase in exchange for a discount.
Another example is sending information or instructions about a product or service a customer is interested in or has purchased from you.
Take a look at a company called Orizaba:
Orizaba has a dedicated product page promoting its Mexican blankets. When customers purchase a Mexican blanket, they receive an email from Orizaba explaining how to actually use the blanket.
Here are some examples of when to send a customer (or potential customer) an email:
- When they almost make a purchase but change their mind
- When they make a purchase
- When they sign up for your newsletter
- When they take action on your website, email, or social media
- When you have a new promotion, offer, or special feature
- When they tell a friend about you
The best type of emails to send to your customers are the ones that emphasize your product’s or services’ value (as long as they’re transparent and relevant).
3. Prioritize customer service
Providing round-the-clock customer support service is an excellent way to improve your business’s CLV, even if it costs you more money.
You can provide customer support 24/7 via email, phone, social media, or your website (the more options, the better).
One of the best and easiest ways to do so is by having a customer service chat pop-up on your website like this Trial attorneys office does:
In this example, you can see two customer service pop-ups — one on the left, and one on the right — making it super easy to contact them.
A contact pop-up can also entice your customers or potential customers to send a message even when they weren’t planning on it. This visibility alone is enough to make some curious to have a chat with you anyway (a prime opportunity to get to know your customer and hopefully make them a long term customer).
4. Maintain a Knowledge Base
A Knowledge Base is an important part of your support infrastructure.
Becoming an expert in your industry is crucial to increasing loyal customers — and what better way to do so than having a Knowledge Base or a blog?
While putting one together will take some time, effort, and money, it’ll all be worth it.
Your Knowledge Base should include access to self-service articles, tutorials, video guides, and other supporting documentation like customer success stories and informational articles.
Take real estate company Real FX, for example.
Real FX has a blog dedicated to giving advice on all things related to their industry like this blog post about inspection contingency:
In this post, homebuyers can learn all about their rights as well as how to hire an inspector and what the inspection process looks like from start to finish.
Real FX has positioned themselves as true Real Estate experts with their helpful articles, property searches, and free market analysis.
A Knowledge Base is an invaluable way to show your expertise, offer self-service opportunities, and build trust with your customers so they’ll stick around.
5. Offer discounts and special offers
Offering discounts and special offers is a great way to entice your customers to continue spending — especially if the offer is for a product or service you know they love.
You can offer discounts and special offers:
- When new products/services launch
- For seasonal products/services
- When products/services are going out of stock or discontinued
- For company anniversaries and customer birthdays
- After a customer makes a purchase
- When a customer almost makes a purchase
The best places to showcase discounts are where your customers are.
For example, are they avid Instagram users? Do they check their email every day? Do they use search often? Use these insights to help you decide where to feature your discounts, whether it be via personalized emails, social media ads, website pop–ups, etc.
Check out this discount pop-up featured on Bay Alarm Medical’s homepage:
In this example, anyone who uses search to find an emergency medical alert system, will find their website and be greeted with an instant discount pop-up.
Offering discounts and special offers for new and existing clients is an incredible way to increase customer lifetime value.
CLV measures how long a customer will continue buying from you.
In the end, what matters most is delivering tremendous value, understanding your customer, positioning yourself as an expert, prioritizing customer service, and offering relevant discounts and special offers.
And there you have it — the ultimate guide to improving CLV for your eCommerce business.
Like what you're reading?
Join the informed eCommerce crowd!
Stay connected to what’s hot in eCommerce.
We will never bug you with irrelevant info.