Customer lifetime value, or CLV, is the most important metric you can use to track profitability in e-commerce.
You need it to make crucial decisions regarding profitability, advertising budget, and marketing strategy.
It's also more valuable than other metrics such as click-through rates, micro conversion/conversion rates, or bounce and exit rates, because unlike those commonly used metrics, CLV is a long-term prediction.
So naturally, increasing the lifetime value of a customer should be a concern.
According to Econsultancy's Cross Channel Marketing Report 2013, nearly 25% of businesses don't care about customer retention, while more than 70% do, and for good reason.
Why is CLV Important?
At the most basic level, CLV is the value of the customer, or an estimated total of how much this person will spend over the lifetime of the relationship.
Customers with a high lifetime value are typically more expensive to acquire, because they have brand loyalty. Customers with a low lifetime value are cheaper to acquire, but acquiring only 'cheap' customers is a concern for e-commerce, because they typically only purchase once, lowering the acquired revenue per customer.
If we use an example company ABC Sales, whose average shopping cart sells for $45, then you can make the following assumptions using this metric.
The first is that standard short term customers, who only make one purchase, will only be worth a maximum of $45 minus costs of advertising, costs of products, retail, customer support, etc. The mid term CLV customer, who makes two purchases in a year, is worth $90, minus those costs, where a customer who stays for 3 years will have a CLV of $270.
This reduces costs for ABC Sales, increasing the value and return on investment (ROI) of acquisition marketing.
Why is CLV the most important metric?
Lifetime value becomes especially interesting when you compare the ROI of a single purchase customer with that of a multiple purchase customer. Because customer retention costs less than acquisition, the cost per sale decreases with each recurring purchase, even considering that retainable customers cost more to acquire than short term.
Bain & Company found that reducing churn by just 5% could increase profits by 25% or more.
Marketing Metrics found that customers who have bought from a company are 60 to 70% likely to buy from it again, while a new customer is only 5-20% likely to make a purchase.
By switching up some of your marketing efforts towards previous customers, you can see more ROI than you would when focusing primarily on new prospects. Of course you shouldn't abandon either option, as you need new customers for growth, and to account for customer churn.
Focusing on customer retention is a smart move because existing customers who are more likely to make a purchase are more affordable to your market. Rather than spending on high-cost acquisition, you can market to existing customers through low cost social and email spaces. Some companies, like John Wiley & Sons, estimate that you can reduce costs of marketing by as much as 90% through customer retention, although most businesses use a benchmark rate of around 30%.
How to Calculate CLV Without A Formula?
Some e-commerce stores use a formula to calculate their CLV, but this can be difficult, especially if you’re not a data analyst. You can use a program to get similar results, and you don’t have to worry about the accuracy of your calculations, because you won’t be doing them. While there are multiple options, Extensiv Order Manager’s own CLV analytics pulls information straight from your existing sales channel reports, allowing you to use your data to create automated CLV estimates. With features including periodic updates for real time reflection, identifying customers across all of your sales channels, and tracking new sales as well as repeat customers, Extensiv Order Manager’s metrics allow you to create an accurate overview of your customer’s lifetime value.
In the example photo, 0.01% of customers made 5 purchases, for a lifetime value of $75.06. Another 99.02% of customers were one-time buyers with a lifetime value of $18.75. The vendor sells filters and replacement parts, so their purchases are for specific machines. With specific needs, the average shopper will only come back when their filters or parts wear out, causing a lack of short-term repeat customers. The low median value also shows that customers only purchase the parts they went to the store to buy.
As a seller, you can use this information to identify the narrative of your buyers, and to see what you can work on to boost CLV. In this specific case, the e-commerce business can use the data to focus on customer retention, using marketing strategies such as coupon codes to encourage repeat buyers or subscribers.
What Can Online Sellers Do to Increase CLV
Increasing CLV is the logical result of studying customer retention and long-term sales. It costs less to keep an existing customer, and they're likely to buy more. A study by Gartner shows that 65% of sales come from existing customers. Increasing the lifetime value of a customer, or improving customer retention, is therefore crucial to increasing profitability in e-commerce.
(Image Via Avatics)
Upsell and Cross Sell - As IPSOS Loyalty points out, many customer retention and value metrics are based around the idea that customers are going to purchase at full price, and in increasing rates. Unfortunately they often wait for sales, purchase less, or buy at discounted rates instead. Using upsells and cross sells changes this, and increases the lifetime value of the customer. For example, when you walk into a McDonalds and order a cheeseburger, "Would you like fries with that" is a form of upselling, offering you a more expensive version of the product you chose to purchase. If you go to a garage to replace your tires, and you walk out with new rims, that's cross selling. Offering upgrades or related products to customers increases revenue and therefore the value of the customer.
Offer A Quality Customer Experience - From your design and layout, to customer service, to social media pages, to website navigation, product quality, and even ease of returns, a quality customer experience should be your foremost consideration. Amazon, one of the largest web shops in the world, is a prime example of this. With customer service tools that allow users to get in touch with Amazon quickly and easily, voice their displeasure if they do not like a product, and a guarantee of a return if the product is not as described, Amazon has become one of the most trusted web shops in the world. Bond Brand Loyalty's study on the subject showed that poor customer service will deter 35% of customers from shopping with you again. Apple, the king of brand loyalty, focuses on a quality customer experience. A 2011 brand loyalty survey showing that Apple triggers parts the brain brains normally associated with religion in loyal customers shows just how effective that tactic is.
Offer Incentives - Sometimes retaining a customer means offering incentives to that customer. Whether as an incentive to sign up, email or social media exclusive incentives, or personalized incentives such as birthday discounts, offering existing customers a reason to shop with you can be a huge factor in their decision to return.
Best Practices for Customer Retention
Customer retention might seem expensive, but, according to the Chartered Institute of Marketing, it costs 4 to 10 times less to keep a customer than to acquire a new one. Because that same customer is also more likely to make a purchase, the benefits are clear. According to KISS Metrics, the average value of a lost customer is $243, which clearly translates that you should focus on keeping customers, so long as you spend less than that amount in doing so.
Quality - Offering quality and brand value to consumers is one of the easiest ways to retain customers. Those who have a good experience with a product or service, and purchase it at a rate that they think is fair, are more likely to return. Lee Resources International suggests that only 4% of customers will ever voice dissatisfaction, while 91% will never return after being disappointed, so you only have one chance to offer a quality product.
Communicate Frequently - Customer retention ties in to whether or not the customer remembers to shop with you when they need something. Offering incentives to follow you on social media, to sign up for your email newsletter, or engage with you on a space like a blog will boost customer retention. Communication should be valuable, and timed so that it is neither annoying, nor overwhelming. Use multi-channel marketing, so that customers see you frequently, on every space they visit.
- Optimize your 'thank you for purchasing' page with incentives to sign up for a newsletter, Facebook, etc.
- Allow customers to easily offer feedback on customer service and on products. Amazon is one of the most popular stores in the world because of feedback.
- Track engaged customers and figure out why they are engaged
- Calculate your churn rate, and work to reduce it. Figure out why customers are leaving. When they leave you feedback, listen, and credit them for the change.
- Don't market aggressively
- Be helpful
- Offer quality over quantity
- Be responsive - 34% of ZenDesk customers ranked 24/7 or fast customer support as important
- Engage with customers.
- Don't charge for returns - Zappos found that the customers who spend the most, return the most, but are also the most valuable
- Don’t use automated phone systems
- Reward loyalty, whether with rewards points, individual customer attention, or a discount newsletter.
- Offer registration or newsletter signups with incentives for doing so
- Offer email customer service. More than 44% of customers prefer it over phone
Increasing customer lifetime value can increase your ROI, increase sales, and decrease what you spend to acquire each sale. Focusing on customer retention in addition to acquisition can save you money, while increasing profits, but there are many factors to consider, such as the value of the customer, and the cost of retaining them.
If you're interested in improving CLV, you can start by examining your analytics to identify your recurring customers. With this information, you can define the narrative of your customer’s experience and improve it.
Want to learn more about Extensiv Order Manager’s CLV analytics? Retaining customers isn't the only step you can take to increasing your profits. From unifying your entire e-commerce business and getting real analytics into your sales channels, you can grow your company longterm and make smarter decisions - all through automated functions.
Work Smart. Sell More.