Customer Lifetime Value: What is it, Why is it Important, and How to Improve it

Every customer is important right?………Well, a secret in the new age of e-commerce is that some customers are more important than others. Returning shoppers spend 3x the amount that first-time shoppers do and accounted for 1/3rd of the dollars spent on e-commerce last year. An easy way to increase repeat and loyal customers is to calculate their Customer Lifetime Value (CLV).

What is CLV?

CLV is a projection to estimate the total revenue a business can reasonably expect from a single customer account. When CLV is compared against Customer Acquisition Cost (CAC), it gives companies insight into how long it will take them to recoup the cost of acquiring a new customer. In the past, CLV had been complex to calculate given the amount of customer data required for an accurate forecast. Recently there has been a focus on CLV across all industries, but specifically in e-commerce as more data is collected and unique applications of the metric are explored.

The two main components of CLV are historic and predictive values. Historic CLV calculates the value that your customer has brought to your business up until now, while predictive CLV forecasts the value you anticipate from a single customer’s account. Both can be applied to a single customer or as an average across your entire customer base.

Historic Customer Lifetime Value (CLV) = (Annual Profit from Customer x # of Years they have been a customer) — Customer acquisition cost

Predictive Customer Lifetime Value = CLV = ((T x AOV)AGM)ALT

T= Average monthly transactions

AOV= Average Order Value

ALT= Average Customer Lifespan (in months)

AGM= Average gross margin

Why is CLV important?

CLV gives you the ability to segment your customers by the cost of acquisition and revenue into; Profitable, Highly Profitable, and Not Profitable buckets. Now you can determine the identifying factors that your most profitable customers have in common and optimize your acquisition spending for maximum value rather than minimal cost. This allows you to focus your ad spend, e-mail campaigns, reward offers, etc. on the right customer segment with messaging that has proven to deliver the best results. The CLV metric is valuable as a health-check of your customer base or as a tool to look historically on your acquisition strategy and iterate your approach towards unprofitable customers while repeating the process used on the profitable segment.

Beyond this, CLV is contributing to the preferential treatment that some corporations provide their best customers. Whether it’s routing to a more experienced call-center or providing a better discount code offer, companies are rewarding high-CLV customer’s with perks that may not be easy to notice. Customer data points such as frequency of returns and proclivity for on-sale items are taken into consideration and can negatively affect a customer’s CLV. Large firms have realized the importance of supporting their strong customer segments and this investment is paying dividends for brands. Last year, Nike acquired the firm Zodiac to strengthen their analytics department and they were rewarded with ~10% revenue growth year-over-year.

How do you Improve CLV?

You’ve seen how CLV can be used internally to review acquisition strategy and reward profitable customers, but your overarching goal with this metric is to ultimately improve it. Customer loyalty and the average order size are the two factors that contribute the most to improving CLV. While building customer loyalty can take a while to develop, there are certain techniques you can apply to encourage your customers to spend more while on your site. Approaches for both are covered below.

Increase Your Average Customer Spend

Offer Free Shipping — Offering free shipping is a great way to increase customer spend by playing on their psychology as a buyer. Depending on the price of your products, set a threshold a bit higher than your average order size to motivate the customer to add something to their cart if they are close to the free shipping price.

Upsell/Cross-sell Items — Promoting similar and upgraded products on your checkout and tracking pages is a straight-forward approach to increasing your average order size. It has never been easier to upsell/cross-sell items with SnapShip’s Branded Tracking Page. Instead of sending your customers to a carrier’s page, SnapShip directs them to an order tracking page branded with your company name, logo, and products. Other tips for upselling/cross-selling include; bundling products, sidebar widget w/ popular choices, and limiting your recommendations.

Comparison Pricing — Allowing your customers to compare multiple of your products against each other is a great way to increase order amount. By offering comparison pricing, you are able to alleviate some of the buyer anxiety that comes along with a purchase, especially a high-cost item.

Increase Repeat Customers and Brand Loyalty

We have covered techniques for increasing brand loyalty in the past, but it is the most important aspect of your customer’s lifetime value. 83% of consumers say that loyalty to a particular brand is driven primarily by trust. Beyond this, there are both explicit drivers of loyalty, like a rewards program or coupon code, and implicit drivers of loyalty, such as quality of service or brand reputation. Gaining a customer’s trust can take a considerable amount of time and is achieved through consistent and responsive behavior. Below you will find a few ways to turn one-time shoppers into lifetime fanatics of your brand.

Offer Proactive Customer Service — As cliche as it may sound, customer service means everything for a high-growth e-commerce brand, especially when you have to compete with major e-tailers. Instead of reacting to your customer’s problems, try to get out in front of them and notify your customer of any changes to their account if possible. This small act can help build huge amounts of trust with your client base. While it may not be feasible for your entire customer base, focus on your most profitable customers initially, until you can scale your CS process to all.

Reward your best customers — Loyalty programs have long been used to reward avid shoppers for their elevated levels of spending with a particular brand. Recently, the popularity of these programs among large retailers has decreased due to the lack of interest from participants. After segmenting your customer base by profitability, you can directly reach out to your most profitable customers and offer rewards based on their CLV. Not only does this reward their past behavior, but it also lends an exclusivity factor to your rewards program, which will incentivize future purchases.

Elevate your unboxing experience — In order for your client to become loyal to your brand, they first have to be excited about the brand! One way to cultivate this excitement is to use the fulfillment process as a post-purchase marketing tool. The addition of custom branded assets creates a more memorable brand experience when the package arrives. Custom packaging also increases the likelihood of a positive customer experience. At SnapShip we leverage industry connections to provide high-quality custom assets at cost-effective prices.

CLV has become one of the most important metrics for high growth e-commerce brands. As more data points become quantifiable, the applications of CLV will increase along with them. For e-commerce, it’s no longer about trying to bring on as many new customers as possible and providing one level of service. It’s about segmenting your customer base and maximizing the value of each group while constantly working to promote brand loyalty.

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