How to Calculate Customer Lifetime Value

Customer Lifetime Value (CLV or CLTV) plays a significant part in analyzing the growth of any retail or ecommerce business.

This sounds complicated and confusing, but believe us, it is quite a simple approach that explains how much money a customer is expected to spend on your ecommerce site or products during their entire lifetime.

This makes CLV an important metric of customer profitability.

With CLV you can predict the turnover or profit and make the necessary alterations to your marketing budget, accordingly.

The longer the customer purchases from your online store, the greater the customer’s lifetime value.

This also makes evident that as an e-store, you should always strive to offer your customers great products and services to keep them well-fed and satisfied.

This will help customer retention and also lead to an improvement in customer lifetime value.

You and your team must learn about CLV and its calculation techniques to retain the highest-value customers.

Table of Contents

Let’s calculate CLV

We have listed the most simple methods of calculating Customer Lifetime Value:

You will need some data from your business such as:

Average cart
Purchase frequency
Customer value
Average customer lifespan

1. Average cart

It is the average value of purchases made on your site during a particular period.

2. Purchase frequency

It gives you an idea of how many purchases a customer has made during a given period. It also lets you know how many unique customers have shopped from your site during a given period.

The formula for calculating this is:

Purchase frequency = Number of orders / Unique customers

3. Customer value

The average cart value multiplied by the average purchase frequency determines customer value.

The formula for calculating this is:

Customer value = Average cart x Purchase frequency

4. Average customer lifespan

The data is likely to change as per your business model. It is calculated by averaging the years or period the customers spend on your website making purchases. Generally, the average period is 1 to 3 years.

Customer Lifetime Value (CLV)

Finally comes the calculation of customer lifetime value. It helps you to know the average customer lifespan on your website.

The formula for calculating this is:

Customer lifetime value = Client value x Average lifetime

Customer Lifetime Value Calculation with Variants – If you wish to break the calculation a little further then consider the variants mentioned below:

CLV in profits/margin

To add more meaning to the customer lifetime value calculation consider the margin.

Customer lifetime value in the margin will help you discover the profit made by each customer.

Simply the calculation is made in terms of profits instead of turnover.

The formula for calculating this is:

Customer lifetime value = Average cart x Purchase frequency x Margin

CLV in segments

If you want to make decisions based on customer behavior, segmentation can add true value. There is no such formula for calculating in segmentation. You can calculate a customer’s lifetime value based on various segmentations like demographics, acquisition channels, geographical profiles, etc.

How to increase customer lifetime value?

Reliable ways to increase customer lifetime value:

1. Enhance the customers’ shopping experience

It is wisely said that the first impression is the last, hence your website’s first impression counts. Make sure you offer your customers a smooth and hassle-free eCommerce experience.

Offer utmost customer support with free assistance through FAQs, guides, articles, etc. express properly why your store is better than the rest. Make their experience more memorable by giving them coupons, discounts, free shipping, etc.

Suggested Read: Guide to the Perfect eCommerce FAQ Page

Benefits of FAQs for an eCommerce store
When to have a FAQ page
FAQ components
Best practices for eCommerce FAQ page

2. Upselling and cross-selling

Additional services always help in building customer loyalty.

You can increase your average shopping cart value by offering premium services like delivery services, subscription offers, video catalogs with subscriptions, great discounts, etc.

As much as possible keep customers engaged with your online stores by offering such services, frequently.

3. Attract by newsletter

Email marketing still plays a significant role in customer engagement. You can send attractive email newsletters to your customers and keep in touch with customers.

Don’t dedicatedly rely on it but use it as an additional way to keep customers engaged.

Do not forget to send newsletters with special offers on special occasions like Black Friday, Holiday season, Christmas, etc.

According to eCommerce sales studies, an increase in customer retention has the potential to increase your profits from 25% to almost 100%.

If you want your customers to turn into loyal customers who forever will consider your brand for making a purchase then follow the post-purchase email strategies.

You can send email newsletters on a regular basis. Also, make sure the subject and title of the email are compelling enough to get clicked by the customers.

4. Increase interaction

It comes as no surprise, to stay in touch, interaction plays a vital role. Increase customer interaction as much as possible. Keep an eye on the customer’s online activities and try to target every interaction point.

Organize interactive quizzes, post positive customer reviews, and testimonials, and encourage communication. Create engaging and helpful content that solves customer-centric problems.

5. Focus on after-sale services

One of the most powerful ways to increase customer lifetime value is by offering second-to-none after-sale services.

Try to be at your customer’s service 24*7. Not just after-sales, if your customer is facing any problem during purchase like payment issues etc, try to resolve it instantly.

Listen to the most demanding customers. In case of complaints or returns, respond to them in a jiffy.

Offer benefits to loyal customers. Whatever problems customers face, try to resolve them as soon as possible.

Ask for customer feedback and in case of negative feedback, analyze the problem area and try to fix it or make necessary alterations.

You can come up with a customized chat service for instant communication.