Everything You need to know about Customer Lifetime Value in Ecommerce

Everything You Need to Know About Customer Lifetime Value in Ecommerce

INTRODUCTION

 
 
 
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Every day, it seems like there’s a new metric you have to keep up with as a marketer. From average order value to repeat purchase rate, there are a myriad to track.

But if there were a marketing metric bracket (think Marketing March Madness), we’re confident that customer lifetime value (CLTV) would make it pretty far in the tournament, if not to the championship.

Why? It’s been called the most important metric for your business, and with good reason. It’s also one of the more underappreciated, perhaps because many brands struggle to properly define and calculate it.

But the longer you put off keeping track of CLTV, the longer it will take to understand which of your marketing campaigns drive customer loyalty and increase overall revenue. This means fewer strategic marketing campaigns, fewer empowered marketers on your team, and ultimately less revenue for your brand.

Marketers know that it’s more costly to acquire new prospects than to retain existing ones. But how does that manifest in how we actually determine our customers’ worth to our brand, and consequently, how does it shift our marketing strategy?

Never fear, because we created this guide all about customer lifetime value to consolidate everything you need to know about this important metric—perhaps the most important metric—for your B2C brand. Once you have a strong grasp on CLTV and how to implement it into your day-to-day work as a marketer, you’ll be thinking about the customer lifecycle in an entirely different way.

What is Customer
Lifetime Value?

Before we dig into the applications of CLTV for your brand, let’s make sure we’re on the same page definition-wise. Whether you decide to call it CLTV, CLV, or LTV, what matters most is that you’re defining and measuring it correctly.

Here’s the simple definition:

Customer lifetime value is how much money a customer will bring your brand throughout their entire time as a paying customer.

At a glance, CLTV tells you how much a customer is worth to your brand and gives you insight into their overall value. From there, you’ll have a better understanding of how much you should be investing in customer retention going forward.

Not only that, but customer lifetime value clues you into whether or not you can expect certain customers to become repeat customers. If their customer lifetime value is high, chances are they’re fans of your brand and will continue to buy more of your products. If not, they’re likely just a passive customer who made a one-time purchase and will take extra effort to re-engage.

How to calculate customer lifetime value

You don’t need to be a math whiz to figure out your brand’s customer lifetime value. With just your phone’s calculator and a few key numbers, you’ll have a crystal clear picture of where your customers’ lifetime value stands right now, along with what you need to improve that number in the future.

In its simplest form, you can calculate CLTV by taking your average order value, multiplying by your average customer’s purchase frequency, then dividing that number by your average customer lifespan. 

Let’s say you’re a kitchenware online store that specializes in high-end cutlery. Right now, your average order value is $150, and your purchase frequency is twice every year. On top of that, your average customer lifetime is three years. Plugging in all of that information into the formula, your CLTV would be $100. Overall, that’s a pretty good number for a niche store that likely counts one-time purchases as a large part of its revenue.

Of course, there are variations on this formula depending on how in-depth you want to get. But at a high level, using this calculation will set you up for CLTV success.

Pro tip: Whatever your CLTV number ends up being, you want to keep it higher than your customer acquisition costs (CAC). That’s not to say you should primarily focus on your CAC. If you’re not thinking beyond your customer’s first purchase with your brand, you’re not optimizing for CLTV in ways that help your brand hold on to the customers who consistently engage with it.

Why customer lifetime value matters for your ecommerce brand

 
 
 
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Proving the worth of your product and increasing your revenue aren’t subjects you need to be convinced of as a marketer. But allocating more of your time, resources, and budget to look at your marketing from a more granular perspective might be.

Still need convincing that CLTV should be a go-to metric for your marketing team? Here are three points that will hopefully give you a more thorough context around its value.

1. It’s a faster path to additional revenue through retention

If you’re looking at customer lifetime value as a way to justify spending more on acquisition, you’re probably focusing on the wrong side of the equation. In actuality, the best way to maximize customer lifetime value is by investing in retention.

Think about it: For every 1% of shoppers who return to your ecommerce site after their first visit, your revenue increases by approximately 10%. So if you retain 10% more of your existing customers, your revenue effectively doubles.

Here’s another way of looking at it: Reducing your churn rate by 5% increases your profitability by anywhere from 25 to 125%. Oh, the wonders that investing in a CLTV-focused strategy can do!

2. It’s an easier way to incentivize repeat customers

Not only is driving CLTV a quicker way to increase revenue, but it’s also the easiest way to do it. Although ecommerce marketing may be a complex task, technology is making it exponentially more manageable and effective. If you’re using a B2C CRM, you can see easily see how CLTV affects the bigger picture of your overall marketing efforts.

In ecommerce, the probability of selling to an existing customer is around 60-70%. Yet the probability of selling to a new shopper ranges from 5-20%. In addition, returning customers spend an average of 67% more than first-time customers. Knowing to focus on repeat customers—as well as getting one-time customers to make another purchase—clears the way for centering your marketing strategy on these segments in order to drive CLTV.

3. It’s a more profitable path to revenue and customer loyalty

Chances are you’ve heard of the Pareto Principle, which hypothesizes that 80% of your revenue comes from 20% of your customers. Not surprisingly, this focus on your most loyal customers makes a lot of sense for increasing your customer lifetime value.

When you calculate your brand’s CLTV, it’s easier to see and segment your highest-value customers, giving you a chance to target them with special campaigns intended to increase their loyalty—and their overall spend. And why wouldn’t you, when just a 5% increase in customer loyalty can increase your average profit per customer by 25-95%?

How Tea Forte increased their CLTV by 25%

What does it look like when a brand truly optimizes for CLTV? Here’s a great example.

Known for quality handcrafted teas with exquisite packaging, Tea Forte is the go-to luxury tea brand for casual and ardent tea drinkers alike. While they certainly have a strong, recognizable brand, Tea Forte lacked a consistent marketing strategy that catered directly to their highest-value customers’ needs.

By using a B2C CRM to implement behaviorally driven campaigns with smarter segmentation, Tea Forte saw a 20X return on spend in just under a year. But more than that, they’ve seen a 25% increase in their customer lifetime value by pinpointing the right people to message at the right time.  

This attentiveness to campaign messaging based on buyer personas helped the Tea Forte team gain a deeper understanding of their customer, order, and product data.

According to Jurgen Nebelung, Tea Forte’s VP of Ecommerce and Digital, the key to increasing the brand’s CLTV came down to taking a customer-centric view of marketing data rather than a campaign-centric one. “It’s important for us to understand the conversion and revenue impact of each touchpoint and put the customer, rather than that channel, first,” he said.

Now, Tea Forte incorporates behavioral campaigns into their entire email strategy, driving higher CLTV through post-purchase behavioral series that are personalized to each buyer.

"It's important for us to understand the conversion and revenue impact of each touchpoint and put the customer, rather than that channel, first."

Campaigns to maximize customer lifetime value

How can you optimize your own marketing campaigns for CLTV? The key is to focus on increasing your repeat purchase rate and incentivizing long-term customer loyalty. Obviously, that isn’t going to happen overnight. But for now, you can start brainstorming how you might include these tactics in your customer outreach.

Let’s kick things off with four example campaigns that incorporate everything that matters about CLTV into smart copy, design, messaging, and targeting.

REPEAT PURCHASE CAMPAIGNS

From post-purchase thank you messages to the classic cart abandonment email, campaigns that center on getting customers to make a second purchase are perfect for increasing CLTV.

That’s because a customer who makes a second purchase with your brand is much more likely to make a third, fourth, and fifth purchase. Thus, prioritizing AOV for first-time purchasers isn’t going to be as valuable as it will be for repeat purchasers.

A comprehensive understanding of the customer lifecycle gives you the tools to optimize your campaigns for the most important touchpoints. Based on the numbers alone, few things in ecommerce are as important as getting customers to make a repeat purchase.  

For Le Creuset, encouraging repeat purchases means offering first-time customers free shipping and a discount on their second order, while also trying to upsell them on a product that’s similar to the one they bought.

REPLENISHMENT CAMPAIGNS

If you’re selling replaceable or consumable products, integrating replenishment campaigns into your marketing strategy can also up your CLTV. That’s because they drive more predictable revenue and profit from your repeat customers.

Replenishment campaigns also yield higher engagement rates, which actually increase when you coordinate campaigns across multiple channels for maximum visibility. By using replenishment campaigns to be proactive about driving repeat purchases in a personalized and timely fashion, you can put your new customers on the path to becoming loyal shoppers—which is exactly what PlasticPlace does with this email.

cross-selling CAMPAIGNS

When you’re able to point your new customers to related products that acknowledge their needs, the more likely they are to make additional purchases and increase CLTV.

When it comes to recommending products to customers, you can’t have a one-size-fits-all solution. In fact, 74% of customers get frustrated with brands that recommended irrelevant content.

By keeping the entire customer lifecycle in mind, you can analyze browse behavior and historical purchases to source valuable insights about what your customers are looking for, then deliver personalized recommendations right to them.

Keep in mind that cross-selling campaigns work best when:

1. They’re coordinated across multiple channels.

2. They include dynamic product recommendations.

3. They’re delivered right after a customer has made their first purchase.

You’ll see these tactics used all the time by home goods sites like Wayfair, when they encourage you to check out related products you might need for an item you just added to your cart.

LOYALTY CAMPAIGNS

Offering rewards in exchange for purchases is a powerful way to encourage higher-value customers to buy more—so much so that 70% of consumers will change up when and where they shop in order to reap the maximum reward benefits.

Yes, providing incentives for frequent purchases is an effective driver of CLTV. But on another level, tailoring those rewards to target your customers’ unique needs creates stronger relationships between you and your customers, something Beardbrand clearly had in mind when creating their rewards program.

Next Steps

You’ve calculated your CLTV, you’ve seen why it matters for your ecommerce brand, and you’ve even gotten inspired by some first-rate marketing campaigns to help you grow your customer lifetime value. As you start taking the next step, here are three steps to increase conversions and keep your CLTV momentum going.

1. Use customer data to deliver more targeted content

Whether you realize it or not, you’re sitting on a ton of data from your customers’ interactions with your brand. From names and ages to email addresses and browsing behavior, this is all data you can and should use to inform your marketing messaging and segmentation.

But first, you need to unify and centralize that data so you can get a single view of your customer (a B2C CRM is a great solution for doing this). From there, you can build more granular segments and communicate with customers on an individual level. Then, once all of your data is in one easy-to-access place, you can better understand how customer behavior impacts purchase decisions.

Ultimately, when you use customer data to see where people are in the buying cycle and how that relates to their individual needs as a customer, you can encourage increased conversions and greater lifetime value.

Customer data also gives you the information you need to drive engagement with personalization. Ultimately, when you use customer data to see where people are in the buying cycle and how that relates to their individual needs as a customer, you can encourage increased conversions and greater lifetime value.

2. Personalize your messaging for each stage of the customer lifecycle

Because humans have the attention span of goldfish (no, really), your customers are going to lose interest if what they see on your site and in your ad campaigns doesn’t interest them. In fact, 83% of shoppers will spend extensive time browsing products without ultimately making a purchase.

When your customers shop, they aren’t just telling you about what kinds of products and content they like interacting with. They’re also cluing you into which devices they’re most likely to engage on.

That’s why marketers who observe and track every customer interaction in real-time are better equipped to send the personalized message each customer needs the moment they need it, and on which specific device. In turn, they’ll feel more motivated to complete their purchase.

3. Take advantage of every channel

Get this: Consumers who shop on multiple channels have a 30% higher customer lifetime value. And 73% of shoppers use multiple channels during their shopping journey. But how would marketers ever know this if their data wasn’t all aligned in the same place?

Just as buyers would never restrict their shopping to one platform (be it in-store, online, or on mobile), there’s no reason why you should silo your customer engagement to only one channel. Think of all the options there are to reach your customers, including social media, push notifications, and paid ads. If you want to give your brand the best chance at exceeding CLTV expectations, you can’t hold back with your multi-channel outreach.

For example, if your buyers aren’t responding to email, maybe it’s time to invest more heavily in other channels to grab their attention. Regardless of where you reach your customers, segmentation lets you see which of your high-value customers are engaging on which channels, helping you invest more of your time on the ones that matter most. As long as your brand has a presence wherever your buyer is looking, they’ll be more likely to engage.

FURTHER RESOURCES

Now that you have a far-reaching understanding of why customer lifetime value matters for your ecommerce brand, dig into these additional resources to keep diving deeper on your journey to becoming a CLTV expert.

Map Your Ecommerce Marketing to the Customer Lifecycle

Find out how to plan each stage of the buying process so that it has its own unique and personalized focus, helping to build customer relationships of all shapes and sizes.

Using Behavioral Marketing to Maximize Customer Lifetime Value

You can use behavioral marketing to its fullest effect—while at the same time maximizing CLTV and promoting long-term engagement—by following a few critical steps.

Customer Retention Is Everything in Ecommerce

In this episode of The Empowered Marketer, a podcast all about how the best B2C marketers reach and grow their customer base, get inspired by Glambot’s approach to zeroing in its marketing strategy on long-term customer value.

INTERESTED TO LEARN EVEN MORE?

Can’t get enough CLTV resources for your brand? Our guide to lifecycle marketing is the perfect way to top off all of your newfound customer lifetime value knowledge.