Are you sure you know your customers really well? To better understand your customers and sustain a profitable e-commerce business, one of the necessary metrics you should employ is customer lifetime value. Broadly defined, customer lifetime value or CLV is the projected revenue a customer will generate in their lifetime for your company.
Each business is different, so it’s important that you analyze your own data to establish benchmarks and set goals. To this end, knowing how to calculate the lifetime value of your customer is vitally important. CLV can help you make smart decisions related to effective marketing, sales growth, product development, and customer support. Although it may seem difficult at first, calculating the CLV of your e-commerce is actually pretty easy. Become an expert and learn how to calculate lifetime value below.
Quick and easy: Calculating Historic CLV
Historic customer lifetime value is a quick way to know how much an individual customer has contributed to your business over a period of time. It can be calculated by simply adding all the historic purchases of an individual customer. For example, you want to know how much customer A has spent ordering from your online store in 2015. What you do is compute the sum of all his/her purchases for that year. It’s a simple data that’s easy to calculate, but it can provide invaluable insight even when you’re quickly sampling your customers.
Let’s further illustrate the use of historic CLV with the following equation:
(Sale Value) X (Number of Transactions) X (Retention Time)
Say, you want to to compute the lifetime value of a gym member who spends $30 every month for two years. After inputting the numbers in the equation, the customer value would be:
$30 X 12 months X 2 years = $720 in total revenue (or $360 per year)
Note that while it’s ideal that you use actual numbers from your business, using estimated figures is acceptable especially if you’re in the planning stage of your business or just starting out.
Going more in-depth: Calculating predictive CLV
Now, let’s try to make a more in-depth computation with predictive CLV. While historic CLV is useful in providing transactional data, predictive CLV is considered a more powerful way to understand both the present and future value of your customer.
Predictive CLV also allows you to combine different equations and factors such as the average customer lifespan, average profit margin per customer, customer retention rate, rate of discount, and average gross margin. These are all important in providing you a holistic understanding of your business performance and ways to go further.
Remember that in the context of ever-shifting economic trends, a predictive CLV can help you solidify a strong business strategy by allowing you to think in advance how to keep your customers and acquire new ones.
To illustrate, let’s take up a common dilemma of many businesses: what are the ways to compute the lifetime value of customers who don’t pay the same amount? Here, we’re looking for the average lifetime value of your customers instead of focusing on just a single individual.
Customer A spends an average of $50 per month
Customer B has an average order of $80 per month
Customer C’s monthly average spend is $67
To calculate your average monthly sale, simply do the following equation:
($50) + ($80) + ($67) = $197/3 = $65.67
To calculate the predictive CLV, simply multiply the average monthly sale by the the number of repeat transactions and then by the time you expect to retain the customer.
($65.67) X (12 months) X (3 years) = $2,364
With this equation, the predictive CLV is calculated as $2,364, or $788 per year. Of course, you can adapt the formula to your own figures. You can also expand and combine different equations, depending on your objective, as in this example of Starbucks.
Whether you go simple or complex, calculating your CLV gives you an idea of how much you should spend in profitably acquiring or retaining a customer. From our example above, the profitable acquisition and retention expense should be less than $788 per year per customer.
Measure loyalty: Calculating customer retention rate
To succeed in your business, it’s important that you have loyal customers. Knowing how to calculate your customer retention rate is integral in appraising your customer value. Put simply, customer retention rate tells you how long your customers will likely stick with you. Think of your customer retention rate as a vital information that can give you a better idea of your customer lifetime value.
There are three things you need to calculate for your customer retention rate:
Number of customers you have at the end of a period — E
Number of acquired customers for that same period — N
Number of customers at the beginning of the period — S
Once you have the required data, calculate using this simple formula:
((E-N)/S)*100 = Customer Retention Rate
Let’s say you began with 150 customers (S). You lost 20 customers but gained 50 new customers (N) so you end up with 180 (E).
Using the formula, we have ((180-50)/150)*100 = 86.67%, which is a pretty good rate.
What’s next after calculating your CLV?
Once you have an in-depth knowledge of the lifetime value of your customer, you’re in a good position to make smart business decisions. For example, you now know that the cost to retain and acquire customers should be not more than the amount of what these customers contribute to your business. For product development, use the CLV to decide how you can offer products and services adapted to your best customers.
In terms of a rewarding online presence for e-commerce, CLV can you help you establish an effective strategy for content marketing. Following Propelrr, a digital marketing agency in Philippines, your content marketing should become “centered on enhancing consumer behavior and reinforcing brand significance.” To this end, CLV can provide you with concrete basis to peg your own allowable acquisition cost (the amount spent per customer per campaign) and investment acquisition cost (the amount spent per customer per campaign, which should take into account an initial loss in view of long-term gain).
All this know-how on customer lifetime value can have a dramatic impact on how you sustain your business. CLV costs very little to calculate and doesn’t require rocket science. Now that you know how to calculate the lead lifetime value, use it to get a firmer grasp of your customers and to make business decisions aligned for success.