What is customer LifeValue in E-commerce
Customer lifetime value, or LTV, is a measure that reflects a customer's entire worth on your site based on their sales over time. It considers every single sale a consumer makes on your site, from their very first purchase to their most current purchase.
Client happiness is also inextricably connected to client lifetime value. Simply said, if a consumer is prepared to return to your store and make repeat purchases, you have a satisfied customer who is likely to become a loyal user
How to Calculate It
There are two methods to calculate Customer Lifetime Value (CLV), each depending on the type of data you have at your disposal.
Accumulated Data Method: This method is highly accurate if you have access to historical sales data. It compiles all orders from individual customers to determine their specific CLVs. If you’ve been in business for a while and are just now deciding to monitor CLV, some ecommerce analytics tools can retrieve this customer-specific historical data from your first day of operation. The formula for this method is:
CLV = Order 1 + Order 2 +……+ Order n (where n is the number of orders)
Average Estimate Method: If you don’t have detailed data, you can estimate an average using the following formula:
CLV = AOV x n
This method uses the average order value (AOV) and the average number of orders you receive from each customer. It’s a useful estimation method if you’re just launching your e-commerce store and only have industry data available.
Why This Metric is Important
Grasping your Customer Lifetime Value (CLV) offers a comprehensive understanding of your E-commerce business, highlighting areas of success and potential improvement. Here’s why CLV is vital:
Cash and Growth: Repeat orders from existing customers ensure a consistent cash flow, alleviating concerns about covering a portion of your expenses. The predictability of this income stream facilitates timely payment management, providing financial stability for your business.
A larger margin allows for greater reinvestment in business growth, such as international expansion, product development, or hiring sales consultants, all made feasible by the assurance of recurring revenue.
Resource Management: CLV analysis aids in better financial resource allocation, understanding customer timelines, and making informed decisions for improved ROI and reduced acquisition costs. For example, Knowing a customer’s potential spend of $100 over $10 allows for a tailored acquisition budget, enabling more investment in reaching the ideal target group. This could outbid competitors or afford influential partnerships, likely converting quality leads into loyal customers and enhancing your brand and customer lifetime value.
Customer Retention: Measuring CLV enhances awareness of customer behaviour and value, enabling focus on profitable areas like customer retention. Focusing solely on conversions incurs continuous acquisition costs, reducing sale margins. However, optimizing for CLV leverages existing customers for repeat orders, eliminating recurring costs. This results in full profit margins from subsequent orders, compensating for initial Customer Acquisition Cost (CAC), thereby enhancing ROI.
Profitable Customer Identification: CLV provides insights into customer profitability, facilitating targeted marketing campaigns and acquisition of similar customers to your most valuable ones. A high Customer Lifetime Value (CLV) signifies frequent shopping, satisfaction with service and product quality, and brand loyalty, indicating potential growth. This is an appealing factor for investors if funding is sought.
