Customer Lifetime Value for eCommerce Businesses

One of the best ways to make your business sustainable is by retaining your existing customers. Many entrepreneurs make the mistake of launching marketing campaigns that only focus on getting new customers. While this has been the traditional practice, such is lacking because you can be neglecting your current customers by not crafting,  campaigns, specially designed for them.

Communicating with your current customers entails a different language as compared to communicating your brand with a potential customer. The obvious difference here is that your existing customers already know your products and have actually tried them while potential customers have not yet invested in your products. So, in terms of marketing communications, there should be two sets, specifically: one wherein you entice potential customers to buy; and another, which attracts existing customers to repurchase or upgrade.

In this blog, we will focus on the latter, customer retention. Marketing professionals would know that it’s more expensive to acquire new prospects than to retain existing customers. That is exactly why understanding the behavior of your existing clientele is important. For starters, you must have a good understanding on how much revenue you are generating from your current customers. This is where customer lifetime value comes in.

What is Customer Lifetime Value?

Customer lifetime value is a metric that shows you how much money a customer will bring to your brand the entire time as a paying customer. Whether you call it CLTV, CLV, or LTV, the only thing that matters is that you fully understand it and can measure it right.

Simply put, customer lifetime value will tell you the revenue worth of your customers. This metric will also give you an insight on which among your customers are repeating. The importance in measuring this metric is that you will know exactly, which among your customers need to be nurtured and those that you need to let go.

A high customer lifetime value gives you insights on who are fond of your products and are most likely to continue buying from your brand. On the contrary, if they have a low customer lifetime value, then they’re most likely a passive buyer or those who made a one-time purchase. These customers will certainly require an extra effort to-re-engage.

How to Compute Customer Lifetime Value?

Now that you have a good understanding on the definition of a customer lifetime value, let’s now get to the computation. Don’t worry, you don’t need to be a math genius or some elaborate software for this – just use your phone’s calculator and ready your sales record and you should be good to go. Computing the customer lifetime value is easy, just multiply your annual profit per customer by your average customer lifespan in years then deduct the cost of customer acquisition.

So essentially:

Customer Lifetime Value =

(Annual Profit per Customer x Average Customer Lifespan in Years) – Cost of Customer Acquisition

For example, if you run a home decor online store. Currently, you have:

• $750,000 in annual revenue
• $600,000 in annual non-acquisition costs
• 1,000 customers
• 3-year average customer lifespan
• Average cost of $50 per customer acquisition

In computing for the Customer Lifetime Value:

• Annual profit per customer = ($750,000 – $600,000) / 1,000 = $150
• Average customer lifespan = 3
• Cost of Customer Acquisition = $50
• Customer Lifetime Value = ($150 x 3) – $50 = $400

From here, you can already see that your Customer Lifetime Value is high, assuming your average order value is $200 and up. This is actually great for a niche store that’s most likely to consider one-time purchases as a huge chunk of its revenue.

You can be flexible around this formula depending on how in-depth you want to get. However, on a high-level, this calculation can be a good start for your customer lifetime value metric.

The important thing to note here is that your customer lifetime value must not be lower than your customer acquisition costs. Of course, you don’t want to be doing tons of marketing campaigns when you’re already incurring losses. That’s totally a recipe for disaster and is not sustainable. By knowing your customer lifetime value, you’ll be able to strike the perfect balance between the two, which is perfect for scaling your business at your own pace.

Why is Customer Lifetime Value important?

If you’re still not convinced on the effectiveness of tracking your Customer Lifetime Value, then here are the top reasons why you should measure this for better brand success.

Customer Retention makes your Business Sustainable

Of course all entrepreneurs want longevity for their businesses. However, this will not happen if you focus on customers who come and go. With Customer Lifetime Value, you will have an insight on which way it’s better to redirect your marketing efforts. You might be spending much of your marketing budget towards new customer acquisition efforts yet your actual new purchases are low.

With your existing customers, there’s no hardcore marketing needed. You’ve already gotten their interest, you just have to grow them and keep on engaging with them, so they won’t switch to other brands. If you do this correctly, then you will not have a problem in sustaining your business.

You Can Make Bigger Sales with Repeat Customers

 In eCommerce, the chances of you selling to a new customer ranges between 5% and 20% while the probability of you selling to a repeat customer is relatively high at around 60-70%. Just imagine the opportunity and potential that you can get that’s waiting simply because you refuse to acknowledge it. Customer Lifetime Value will help you make smarter decisions, so you can successfully launch your marketing campaigns and increase your bottom-line in no time.

Word of Mouth sells better than Marketing Campaigns

The best form of advertisement is through word of mouth, all marketing professionals will attest to this fact. So, if you have a good number of existing customers who are happy with your products, then chances are high that they are the ones that work as your marketing agents in spreading awareness about your brand.

This works effectively because consumers are mainly driven by trust. If they personally know someone who has a first-hand experience and who actually recommends your product, then they will most likely buy from your brand. Essentially, nurturing your repeat customers will crossover to attracting new customers as well.

Added Revenue Funnel with Customer Loyalty Programs

Once you discover that you actually have a good number of existing and repeating customers, then you might want to launch your customer loyalty program. By doing so, you will be creating another revenue funnel for your brand directly targeted towards your existing customers through exclusive promotions and offers. Having a customer loyalty program will also give your customers a feeling that you acknowledge them, and thus, giving them further sense of belonging. Basically, it’s a win-win situation. You get another stream of income from a specialized revenue funnel, and your customers get exclusive deals specially designed for them.

How to Improve your Customer Lifetime Value?

Leverage on Personalized Messaging

People will buy from you when they feel like you relate with them on a personal level. That is why more and more brands are shifting to personalized marketing strategies. This works well, since humans generally have a low attention span and will not even take a second to look at something that they are not interested in or is not relatable to them.

In addition, when you know exactly the persona of your customers, then you should be able to craft campaigns that will easily catch their attention. Once you have their attention, the important part is to make sure that your products are communicated in a way that they can relate to them on a personal level.

Invest in Customer Experience

Nowadays, customers are not only looking for brands that can deliver good products, they are also looking for brands that can provide them with outstanding customer service. The way you do this in dropshipping is mostly through after sales, when the customer is waiting for the actual product to be delivered. Many businesses fail in this aspect since they work with a lousy supplier.

A good customer service consistently delivers excellent service throughout the purchasing process of a customer. This includes the website interface, seamless ordering process, quick and instant delivery, delivery of items in good shape, and reliable customer support. When you have all these, then it will be easy to gain the trust and confidence of your customers. One of the things that cannot be achieved by marketing campaigns.  

How to Maximize Customer Lifetime Value?

Maximizing your Customer Lifetime Value is not rocket science. Here are some campaigns that you can take into consideration that can help maximize your Customer Lifetime Value and eventually, your revenue.

Repeat Purchase Campaigns

This can be as simple as post-purchase thank you messages, messages that make customers feel good. Another is by offering great 2nd purchase offers. What this means is that you need to craft an irresistible 2nd purchase offer simply because second purchases are most likely to result in third, fourth, and fifth purchases but first purchases are not likely to have a repurchase. So, making a really good 2nd purchase offer is important in retaining and holding onto your customers. By doing this, you will prevent one-time purchases from happening.

Replenishment Campaigns

If you’re offering consumable products and items, then launching replenishment campaigns will surely trigger the interest of your customer. This is because instead of appealing to their interests, you are now appealing to their needs. In this sense, the need to replenish or refill their product. Selling a need is way easier than selling wants. So, if you’re selling consumable items like essential oils, cleaning agents, and many others and want to be proactive, then replenishment campaigns should definitely be on top of your list.

Customer Loyalty Campaigns

This is what I’ve mentioned earlier. Rewarding your existing customers for their purchases is one of the best ways to attract them in continuously purchasing your products. Customers are not primarily excited to invest in something that they don’t feel a sense of belonging to and when they feel that it’s only a one-way relationship. By launching customer loyalty programs, you will make them feel rewarded for choosing your products over any other brands. Plus, practically speaking, they will buy more from you if they get to enjoy awesome deals as a loyal customer.