As an ecommerce business owner, you’ve likely been told all about the importance of Customer Lifetime Value (CLV). But it’s a complicated metric not only to measure but to improve.
The process to improve CLV will vary from business to business, but there is one thing that any business can do to start improving the lifetime value of a customer, and that is to improve your relationship with them.
Using a Customer Relationship Management (CRM) platform is an easy and scalable way to interact with your customers and provide them with more personalized information and deals. There are several CRMs available, and they all have different focuses and benefits.
We recommend you research how to choose the right CRM for your business, but the important thing is you start the process of leveraging customer data and testing iterations of your messaging and audience segments.
Herein, I will explain how to calculate CLV and how you can use a CRM to optimize your relationships with current customers, improve your products, make better executive decisions and forecast CLV so you can truly dictate how your business grows.
I will present metrics that you should be familiar with. If you need a more comprehensive guide on how to calculate the metrics mentioned in this article, the formulas are laid out in our blog: Planning Your Ecommerce Digital Marketing Budget.
Let’s start with CLV.
What Is Customer Lifetime Value?
Customer Lifetime Value (CLV), sometimes expressed as CLTV, is essentially looking at the value of an individual customer over the expected lifetime of their relationship with your business. Instead of looking for the success of marketing campaigns in the immediate revenue they bring in, we look at the expected value of all the customers it has created.
How to Calculate Customer Lifetime Value
The Customer Lifetime Value calculation starts with calculating a customer’s expected Lifetime Value (LTV). LTV in marketing is the predicted value of a customer over the duration of their relationship with your business and can be determined using the following formula:
Lifetime Value = Average Value of Sale x Average Number of Transactions x Retention Time
To calculate CLV, which measures the profitability of a customer by multiplying the lifetime value by the profit margin, use the following Customer Lifetime Value formula:
CLV = Lifetime Value x Profit Margin
CLV is used to forecast future profitability, determine acquisition targets and set targets for acquisition rates.
How Customer Acquisition Cost Impacts Lifetime Value
The Customer Acquisition Cost (CAC) is the calculation of how much it has cost you to acquire an individual customer:
Customer Acquisition Cost = Sales and Marketing Expenses / Number of New Customers
When you understand the expected Customer Lifetime Value of any given prospect, you have a better understanding of how much you are willing to pay to acquire that customer. You might find that it makes sense to offer a steep discount on a first purchase if the CLV is big enough.
What Is a Good Customer Lifetime Value?
Your Customer Lifetime Value should always be higher than your Customer Acquisition Cost (CAC) to be sustainable. A good CLV is at least 3 times greater, with an LTV to CAC ratio of 3:1. For example, making $150 for every $50 spent falls within this 3:1 guideline.
The Importance of Maximizing Customer Lifetime Value
Customer Lifetime Value is an important metric for measuring where your business is right now and forecasting future profits because it demonstrates how long a customer is expected to keep purchasing from you and how much money they are expected to spend during that time.
When optimizing for CLV, you might look at changing aspects of your business model, from deciding which products you should sell to whether you need to improve the onboarding process or further invest in customer service to face less attrition.
Why CLV Metrics Matter
CLV is a way to take a step back and look at the big picture of your business. Instead of looking at sales for the quarter, you’re looking at customer acquisition rates and improvements in retention because they are signs you’re building an enduring relationship with your customers, and in turn, building a better business.
Take on an executive view of your company and:
- Take a wider look at short and long term marketing goals and strategies
- Focus on growing customer retention rather than individual sales
- Make better decisions in acquiring high-value customers
- Determine better customer segmentation
- Reward customer loyalty
- Increase profitability
How Does a CRM Help?
If you’re wondering how to increase Customer Lifetime Value, CRMs can help. Customer Relationship Management platforms allow you to store, manage and act on customer data. They centralize this data, including personal information, purchase behaviors and contact information, so different teams can consistently interact with customers and make their experience with your brand frictionless.
Specificity – The sales rep who encouraged a customer to purchase can leave information for the customer services department to access when that customer has a complaint.
Scale – We can use CRMs to run different iterations of messaging, promotions and follow-up timings to see what works for different audiences and provide effective communications at scale.
The goal is to increase LTV. If you can increase the LTV of existing customers while keeping acquisition costs the same or lower, then your CLV will be much more profitable.
Three ways to improve CLV with the assistance of a CRM are by improving:
- Attrition: Improve customer satisfaction by having a 360° view of the customer’s relationship with your business so far.
- Segmentation: Provide meaningful discounts and complementary products or services to subsets of your customers.
- Personalization: Act on specific customer feedback that you’re seeing from more than one customer.
Satisfied customers produce the most revenue. Customer Relationship Management software and strategies are an important part of keeping your customers satisfied. They increase customer retention, encourage further purchases and turn your customers into your advocates.
1. Reduce Customer Attrition
We’ve looked at how having a dynamic approach towards determining your acquisition costs and making inventory decisions based on profitability can increase your CLV. Still, reducing customer attrition (churn) is a very effective way to retain your customers for longer periods, thereby improving your CLV.
2. Create Accurate Customer Segments
CRMs are an effective way to build accurate customer segments and measure the effectiveness of your campaigns and messaging to these audiences. Customers are not all equal; different segments will have different CLVs. Using segmentation to manage both your customer acquisition costs and how much time and effort you spend nurturing customers of different values is a more cost-effective way of treating all customers in regards to CAC and CLV.
3. Using a CRM to Scale Personalization
A CRM allows you to use customer purchasing data to segment your audiences to make marketing more personalized and meaningful. Using CRMs to implement personalization tactics that can be automated and are scalable allows you to trigger specific messaging at important touchpoints in the customer relationship journey.
Another effective way to improve customer engagement and on-page retention is to implement a chatbot, allowing your prospect to ask questions and leveraging machine learning and automation to help them find answers or point them in the right direction.
CRMs and Predicting Customer Lifetime Value
CRMS also make the CLV metric easier to optimize as they usually have it pre-built into their software.
Most CRMs can even take advantage of predictive analytics that allows you to determine Customer Acquisition Costs based on the expected LTV of a prospective customer. And as you scale, you will have access to more data, which improves the accuracy of predictive analytics.
Being able to predict CLV, revenue and profitability can improve your ability to make executive decisions. With a good picture of where your company is going and growing, you can make purchasing decisions and staffing decisions, even leveraging more debt to help you meet future demands with more inventory or infrastructure. Actionable insights can be gleaned from predictions of future purchasing behaviors.
Demonstrating your current business strengths and accurately predicting future growth with a tool like a CRM will also make it easier to find investors and partners. This works best with a subscription model where you can count on recurring income. If your ecommerce business is focused on building long-term customer relationships, then being able to demonstrate a high and improving CLV is just as helpful.
Optimizing Customer Relationships For Improved CLV
If you’re looking to improve customer lifetime value, start by optimizing your relationships with your customers. Improve onboarding. Make customers feel special with personalization tactics that reward high LTV customers or loyal customers. Focus on increasing sales and leveraging customer behaviors and comments to choose appropriate products and price points.
Leverage data to make sustained improvements to either how your product is designed or how you support customers after the sale is made.
You can even use the data to determine your ideal customers – those who stay with your business for longer and spend more money on your products – and focus on acquiring more of them.
Your customers can be your greatest asset: they can tell you what they need out of your product or service and what is lacking from the support they expect. Maximizing Customer Lifetime Value and your business using this information will, in turn, transform your customers into your biggest advocates.