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Customer lifetime value is one of the most important ecommerce metrics. It’s more important than open rates, conversion rates, and even average order value.
But why?
Customer lifetime value is a holistic metric influenced by outbound marketing, retention marketing, website design, conversion rate optimization, and every other aspect of your sales cycle.
In short, a growing customer lifetime value (LTV or CLTV) is a sign of a healthy business. Conversely, a poor LTV is a bad omen for online stores and should be addressed immediately.
This article will discuss what customer LTV is, how to measure it, why it’s important, and a few tips for increasing your customer LTV.
What is Customer Lifetime Value?
Customer lifetime value is the total revenue generated by a customer throughout their lifetime. Most businesses look at their average LTV to determine the health of their retention programs, but you can also look at LTV on a per-customer level.
How to Measure Customer LTV
To measure LTV on a per-customer basis, simply add up the revenue from all orders for that customer.
To measure your average LTV, determine your total revenue since inception (or a set period) and divide that by the total number of customers.
Shopify Tip: In Shopify, you can find your total revenue by looking at the “Total Sales” section under Analytics. You can locate your total number of customers by clicking the Customers tab.
Why Pay Attention to Customer LTV?
Customer lifetime value is an important metric because it provides a high-level look at an online store’s success (or failure).
Looking at singular metrics like number of purchases or average order value only tells so much. While it is often important for marketers to use metrics like those to dissect problems within their sales funnel, customer LTV tells a much broader story. An expansive story is helpful because it provides a general health metric.
Now let’s look at some specific examples of why LTV is helpful.
Customer LTV is also a helpful metric when considering your customer acquisition cost (CAC). Unfortunately, some marketers make the mistake of comparing their average order value (AOV) to their CAC. For example, it costs $20 to acquire a new customer and their average order value is $20 — doesn’t sound so good, does it?
But if you look at their CLTV, you can see the bigger picture. For instance, if that same customer places five $20 orders throughout their lifetime, their CLTV is $100 — now the $20 CAC doesn’t sound so bad, huh?
We mentioned earlier that most businesses look at their average CLTV to measure the success of their retention efforts. Companies can also look at individual CLTV to segment lists for marketing purposes.
For example, if your average CLTV is $200 but you have a subsect of customers with a CLTV of $1000, you should treat those customers like VIPS. On the flip side, if you identify a group of customers with a below-average CLTV, you may want to consider a reengagement campaign or promotion to lure them back to your store.
Tips for Increasing Customer LTV
A comprehensive lifecycle marketing strategy is the best way to increase LTV. This approach will optimize every stage of the customer journey to increase sales and, more importantly, retention.
The two most important areas to focus on are average order value (AOV) and customer retention. Obviously, if you can get customers to spend more and do it more often, your LTV is going to skyrocket.
Increase Average Order Value
Here are some quick ideas to increase your average order value.
Upsell More Expensive Products
Use a lower-priced item to get them in the door and try to sell them a higher-priced item with additional bells and whistles while they’re contemplating their order.
Your messaging could be as simple as, “Would you like to upgrade to the deluxe version for $5?”
Crosssell Complimentary Products
Throughout the buying process, including in the shopping cart, you should show your customers other products they might be interested in. Try to sell the value they’ll get by purchasing additional items or highlight how the items can be used together.
Create Bundles or Packages
Packaged deals are a great way to boost your average order value. A popular example is a video game system. Companies like Playstation and Xbox will sell you a system for $280, but for $300, they’ll sell you an extra controller AND a free game.
Those video game companies know exactly what they’re doing: increasing their AOV while also increasing your likelihood of making another purchase (a game, for example) in the future.
Set Minimums for Free Shipping
Setting a minimum for free shipping is an easy way to encourage people to add a few more things to their cart.
Pro Tip: Make your order minimum just a few dollars more than your most popular item. For example, if your most popular item is a pair of socks that cost $25, make your order minimum $30. Combine this with a bundle like we mentioned above (add another pair of socks for just $5), and you’ve created a very enticing reason for a customer to spend a few more dollars.
Implement a Flexible Return Policy
If people know that they can return an item later, they are more likely to make a bigger purchase. But, of course, this only works if your customers actually keep the products — so only do this if you are confident that they’ll want to keep it once it arrives on their doorstep.
Increase Sales Per Customer
The secret to increasing sales per customer is a strategic post-purchase email and SMS cycle. That is to say, every email and text message you send after the initial sale should, in some way, encourage them to make another purchase.
Increasing sales per customer is the primary goal of the retention stage in lifecycle marketing. Here are some basic retention tacts.
Post-Purchase Follow-ups
Set up email and SMS automations the follow-up with a customer after making a purchase.
Subscriptions
Offer a subscription program so that people can receive your products regularly without returning to your store.
Loyalty Programs
Loyalty programs or VIP programs are also great for customer retention. One way to do this is to offer points for every purchase. Once a customer accrues enough points, they are treated to a reward.
Hopefully by now, you understand the importance of customer lifetime value. With new online stores going online every day, customer retention is more critical than ever.
If there is one key takeaway from this article, it’s this: Don’t spend all your time and energy on new customer acquisition. Instead, work to improve your customer lifetime value with a well-thought-out lifecycle marketing strategy.
