What is Customer Lifetime Value and Why It Matters to Your eCommerce Store?
May 9, 2023

What is Customer Lifetime Value and Why It Matters to Your eCommerce Store?

In today's world of eCommerce, it's essential to understand the value of your customers beyond just their initial purchase. That's where Customer Lifetime Value (LTV) comes in. LTV is a metric that measures the total amount of revenue a customer will generate for your business over the course of their lifetime. It's a crucial factor in determining the long-term success of your eCommerce business.

What's the Difference Between LTV and CLV?

For the purpose of this article, we're going to use LTV and CLV interchangeably as both refer to the lifetime value of a customer. Please note, that there are companies who will differentiate between the two for the purposes of granularity and define LTV as the average customer lifetime value across the entire customer base of their eCommerce store, whereas others refer to CLV as the lifetime value for an individual account.

What is Customer Lifetime Value?

Customer Lifetime Value is a powerful tool that can help you make informed decisions about everything from marketing strategies to product development. By understanding the value of your customers, you can tailor your approach to better meet their needs, increase their loyalty, and ultimately drive more revenue for your business.

In this article, we'll dive deeper into the importance of LTV in eCommerce and explore some of the key strategies you can use to maximize this metric. We'll discuss why LTV is such a critical factor in today's competitive eCommerce landscape, and how it can help you build a more profitable and sustainable business.

Specifically, we'll cover topics like how to calculate LTV, the impact of customer retention on LTV, and the role of customer experience in driving long-term value. We'll also explore some of the common pitfalls that can prevent businesses from maximizing their LTV, and provide practical tips for overcoming these challenges.

Whether you're just starting out in eCommerce or looking to take your business to the next level, understanding and optimizing your LTV is essential. So, let's dive in and explore the world of Customer Lifetime Value (LTV)!

How to Calculate Customer Lifetime Value and Why it Matters.

Customer Lifetime Value (LTV) is the estimated amount of revenue a customer will generate over the course of their relationship with a business. It is a crucial metric for businesses to understand as it helps them determine the long-term profitability of their customer base.

LTV is particularly important in eCommerce as it helps businesses determine the value of their customer base and how much they should be willing to invest in acquiring new customers. By understanding the lifetime value of a customer, businesses can make informed decisions about marketing spend, customer retention efforts, and product development.

How to Calculate Customer Lifetime Value.

There are a number of ways to calculate LTV, but a common method is to take the average purchase value of a customer and multiply it by the number of purchases they make in a given time period (usually a year) and then multiply that by the average lifespan of a customer. 

For example, if the average purchase value of a customer is $50, they make three purchases per year, and the average lifespan of a customer is three years, then their LTV would be $450 ($50 x 3 x 3).

Why is Customer Lifetime Value Important to Your eCommerce Store?

Understanding customer lifetime value is vital for eCommerce businesses to make informed decisions about their marketing spend, customer retention efforts, and product development. By calculating LTV, businesses can determine the long-term profitability of their customer base and make strategic decisions to maximize their revenue.

6 Reasons to Improve Your Customer's Lifetime Value.

1. Increasing CLV (customer lifetime value) can increase revenue over time: By focusing on increasing CLV, businesses can generate more revenue from existing customers over time. This is because loyal customers tend to spend more money and make more frequent purchases.

2. Increase store profitability: By increasing CLV, businesses can also increase store profitability. This is because loyal customers are more likely to refer others to the business, which can lead to more sales and revenue.

3. Make Better Decisions on Customer Acquisition Costs: By understanding CLV, businesses can make better decisions about how much to spend on customer acquisition. This means they can allocate resources more effectively and focus on acquiring customers who are likely to generate the most revenue over time.

4. Target your ideal customers: Understanding CLV also allows businesses to identify their ideal customers and target them more effectively. This means they can tailor their marketing and sales efforts to the specific needs and preferences of their target audience.

5. Improve customer onboarding: By focusing on CLV, businesses can also improve their customer onboarding process. This means they can provide a better customer experience and increase the likelihood that customers will remain loyal over time.

6. LTV can help you identify issues so you can boost customer loyalty and retention: Finally, understanding CLV can help businesses identify issues with their products, services, or customer experience. This means they can take steps to address these issues and boost customer loyalty and retention over time.

Customer retention and loyalty play a key role in maximizing LTV. Studies have shown that it is much more cost-effective to retain existing customers than to acquire new ones, and this is particularly true for eCommerce businesses. By providing an excellent customer experience and focusing on customer retention strategies you can increase the lifetime value of each and every customer.

One way to increase LTV is to implement conversational commerce software

Platforms like Humankind, allow 1:1 human interactions between shoppers and brands. Humankind's remote concierge tool empowers brands like Gathr Outdoors to create excellent customer experiences by giving shoppers product recommendations, feedback, and reviews, and walking with them step-by-step through the purchase process.

The Impact of LTV on Business Growth

A high LTV (lifetime value) is a crucial factor for the growth of any business. It is the measure of how much a customer is worth to a company over the course of their relationship. A high LTV means that the customer is loyal and will continue to make purchases from the company over time, resulting in a steady stream of revenue. This allows businesses to invest in marketing and advertising to acquire new customers without worrying about losing money in the long run. Additionally, a high LTV means that the company can offer better customer service and create a better customer experience, which can lead to even higher LTVs.

On the other hand, a low LTV can be detrimental to a business's growth. It means that the customer is not loyal and is not likely to make repeat purchases, resulting in a loss of revenue. This can lead to a decrease in marketing and advertising efforts, which can further decrease the LTV. Additionally, a low LTV can indicate that the company is not offering a good customer experience or that the products or services are not meeting the customer's needs.

LTV and customer acquisition are closely related. A high LTV means that the company can afford to invest more in customer acquisition, as the return on investment will be higher. This can lead to a larger customer base and increased revenue. On the other hand, if the LTV is low, the company may need to focus on retaining existing customers rather than acquiring new ones. 

This can result in slower growth and a smaller customer base. Therefore, it is crucial for businesses to focus on increasing their LTV to ensure long-term growth and success.

4 Strategies to Improve LTV

As you grow your eCommerce store, it's important that you keep LTV as a core metric since it's a measure of the total revenue a customer will generate over the course of their relationship with a business.

There are several strategies businesses can use to improve LTV. One of the most effective is upselling and cross-selling. This involves offering customers additional products or services that complement or enhance their original purchase. For example, a customer who buys a laptop may be offered a discount on a printer or software bundle.

Retargeting and remarketing are also powerful tools for improving LTV. These techniques involve targeting customers who have already interacted with a business, such as by visiting its website or making a purchase. By showing these customers relevant ads or offers, businesses can encourage them to make additional purchases.

Offering loyalty programs is another effective way to improve LTV. These programs reward customers for their repeat business, often through discounts, exclusive offers, or other perks. By incentivizing customers to continue doing business with a company, loyalty programs can help improve retention and increase revenue.

Finally, improving the shopper's experience is essential for improving LTV. By providing exceptional service and support, businesses can build strong relationships with their customers and encourage them to remain loyal over the long term. This might involve offering personalized bundle recommendations, providing fast and responsive customer support, or simply making the purchasing process as seamless and enjoyable as possible. Humankind's conversational commerce solution allows you to do all of these things and more.

Similar to clienteling software, Humankind has the ability to seamlessly transition from an online shopping experience to SMS, (OR) desktop to mobile, the customer is offered the utmost convenience and support as they make purchase decisions.

How to Calculate LTV: A Step-by-Step Guide

Here is a step-by-step guide on how to calculate LTV:

Step 1: Calculate Average Order Value (AOV)

The first step is to calculate the average order value, which is the average amount of money a customer spends on each purchase. This can be calculated by dividing the total revenue by the number of orders.

Step 2: Calculate Purchase Frequency (PF)

The next step is to calculate the purchase frequency, which is the number of times a customer makes a purchase in a given period. This can be calculated by dividing the total number of orders by the number of unique customers.

Step 3: Calculate Customer Value (CV)

The customer value is the total revenue generated by a customer in a given period. This can be calculated by multiplying the AOV by the purchase frequency.

Step 4: Calculate Customer Lifetime (CL)

The customer lifetime is the length of time a customer continues to make purchases from a business. This can be calculated by dividing the total number of orders by the number of unique customers.

Step 5: Calculate LTV

Finally, LTV can be calculated by multiplying the customer value by the customer lifetime. This will give you an estimate of the total revenue that a customer will generate during their lifetime with a business.

By following these steps, businesses can estimate the LTV of their customers and make informed decisions about customer acquisition and retention strategies.

Best Practices for Increasing Customer's Lifetime Value

The power of LTV is that it tells you about your customer's needs and their experience with your brand all at the same time - it may take a little digging, which is where conversational commerce software can help, but once you've identified how better serve your shoppers, here are some best practices to grow your LTV:

A. Personalizing the customer experience: Personalization is the key to building long-lasting relationships with customers. By providing a personalized experience, businesses can improve customer satisfaction and loyalty. Personalization can be achieved by segmenting customers based on their behavior, preferences, and demographics. This information can be used to personalize marketing messages, product recommendations, and customer service interactions.

B. Encouraging repeat purchases: One of the easiest ways to increase LTV is by encouraging repeat purchases. Businesses can achieve this by offering discounts, loyalty programs, and subscription services. By incentivizing customers to make repeat purchases, businesses can increase their revenue and build long-term relationships with customers.

C. Rewarding loyal customers: Loyal customers are the backbone of any business. It's important to reward them for their loyalty by offering exclusive discounts, early access to new products, and special promotions. By showing appreciation for their support, businesses can increase customer retention and LTV.

D. Enhancing customer service: Customer service is a crucial factor in building customer loyalty. By providing excellent customer service, businesses can improve customer satisfaction and increase the likelihood of repeat purchases. Businesses should invest in training their customer service teams and providing them with the tools they need to provide exceptional service.

Increasing LTV is essential for businesses to grow and maintain profitability. By personalizing the customer experience, encouraging repeat purchases, rewarding loyal customers, and enhancing customer service, businesses can increase their LTV and build long-term relationships with customers.

The Future of LTV in eCommerce

2023 and beyond will see rapid changes to the way customers expect a brand to interact with them throughout the shopping experience. We're already seeing the impact of this as brands like Taylormade Golf switch to conversational commerce software by Humankind to provide better recommendations to shoppers on high-consideration products. This is one of the emerging trends in LTV optimization.

Another trend that is exponentially growing is the role of Ai, ML, and NLP used to solve data-driven problems. By using these advanced technologies, eCommerce businesses will be able to understand customer behavior better and give them an unbeatable customer experience that keeps them coming back for more. These tools not only reflect but also impact the consumer's behavior and how they expect to interact with brands.

As PwC found in a recent study, there's still no replacement for human connection in the shopping experience, as 82%+ of the shoppers surveyed said they wanted more human interaction in the experience.

In conclusion, lifetime customer value is a core metric you need to pay close attention to when growing an eCommerce store.

Humankind can help you increase LTV by creating long-term loyalty through 1:1 human interactions with your customers during their shopping experience. Our platform has proven to increase AOV and LTV because customers can see multiple product suggestions, paired together, and customized to their needs - which also increases conversions and your brand's CSAT score.

To see how Humankind can help you increase LTVs, Book Your Demo today!

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