ON customer lifetime value in ecommerce
The customer lifetime value (CLV) is an estimate of all the future profits to be accumulated from a relationship with a given customer. It is used in the business to measure the performance of retention strategies and to provide insights into how much should be spent in customer acquisition.
Decomposing Customer Lifetime value
The formula for customer lifetime value, can then be decomposed as the product of multiple metrics:
CLV = Lifetime * Purchase Frequency * AOV * Profit Margin
The simplified formula describe above has a few caveats such as not taking into account any discounting, and that profit margin is constant concerning both time and average order value. For the sake of explaining the drivers of customer lifetime value, these can be however, safely ignored.
We are taking a simple example of an e-commerce website customer, ordering some shoes online. Customers on the platform have an expected lifetime of two years and tend to order shoes about twice per year, and an average order value of $100, the business profit margin for these types of purchase is about 25%. Based on this information we can compute the expected CLV of the customer: 2*2*100*25%= $100
