How to Calculate Customer Lifetime Value – And Improve It!

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

This might sound to you as complicated and confusing but believe us, it is quite a simple approach that explains how much money a customer is expected to spend in your business or products during the entire lifetime. CLV is an important metric of customer profitability.

Businesses are able to predict the turnover or profit and make the necessary alterations to their marketing budget, accordingly.

If simply put, the longer the customer continues to make a purchase from a particular retailer, the greater is the lifetime value of that customer.

This also makes evident, e-stores to make to their customers well fed should always strive to offer great products and services.

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

Overall, if you want to retain the highest value customers, it is very for business and its team to learn about CLV and the techniques to calculate it.

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

Average cart

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

Purchase frequency

It gives you an idea that how many purchases a customer has made during a given period of time. It also allows you to know how many uniques customers have shopped from your site during a given period of time.

The formula for calculating this is:

Purchase frequency = Number of orders / Unique customers

Customer value

It is the average cart value multiplied by the average purchase frequency that determines customer value.

The formula for calculating this is:

Customer value = Average cart x Purchase frequency

Average customer lifespan

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

Customer Lifetime Value

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 breakdown the calculation little further then consider the variants mentioned below:

In profits/margin

To add more meaning to the customer lifetime value calculation consider margin. Customer Lifetime Value in Margin will help you to 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

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 impression, 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 catalog with subscription, 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, 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 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 customize chat service for instant communication.

Increasing customer lifetime value is not simple. It does require efforts and effective strategies. And even if you bring changes, its result can not be seen immediately. You may have to for weeks or months to see how effectively the changes work. Increased customer satisfaction is certainly key to increased customer lifetime value. Hence work towards its betterment and notice the improvement. The longer the customers continue purchasing on your website, the more your online business will reap profits.

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