February 16, 2021
Customer lifetime value
What is customer lifetime value?
Customer lifetime value (CLV), or a lifetime value (LTV), is the profit margin a company anticipates to profit over its average customer relationship lifespan. While it’s essential to acquire new customers for the company growth, the acquisition cost can be 5x higher than retention. This is why optimising existing customers’ lifetime value is important. In fact, past studies reported that even a 5% improvement in customer retention could direct to an increase in earnings of between 25% and 95%.
How to calculate LTV
In order to calculate CLV, a brand owner must estimate the average sale value, the average number of transactions, and the relationship duration with the customer. Then, calculate the lifetime value by multiplying the average sales value, the average transactions number, and the average customer retention timeframe.
How is LTV used?
In other words, Lifetime Value is an important measurement in revenue forecasting, as every new customer brings extra revenue per month and throughout their forecasted lifetime. Areas of bussiness when you can use the LTV:
- Defining the marketing budget; Adding LTV segments to your customer profiles will help you get a better view of each customer.
- Resource allocation for current customers; Once you can segment your customers according to their LTV, you can designate more resources to acquire and maintain new customers.
How to increase the lifetime value
Increasing the LTV of new customers by preventing churn will increase the long-term revenue for your brand. It is recommended to create a different retention strategy for the LTV segments to prevent and reduce churn.
Why is customer lifetime value significant for your e-commerce
It’s a faster revenue retention growth. The first thing to remember — the best way to maximise customer lifetime value is by investing in retention.
To put it simply: For every 1% of your returning shoppers after their first visit, your revenue rises by approximately 10%. So if you retain 10% more of your existing customers, your revenue effectively increases. Here’s a different way of looking at it: Decreasing your churn rate by 5% increases your revenue between 25% and 125%.
It’s a straightforward way to incentivise repeat customers. In eCommerce, the probabilities of the existing customer to purchase are around 60-70%. But the probability of a new shopper to purchase differs between 5 and 20%. Besides, returning customers spend an average of 67% more than first-time customers. Put your focus on repeating customers and upselling one-time customers to additional purchases.
It’s a more effective way to revenue. A Pareto Principle, states that 80% of your revenue comes from 20% of your customers. Not surprisingly, focusing on your loyal customers’ makes sense for increasing your customer lifetime value. When you calculate your brand’s LTV, it’s simpler to see and segment your highest-value customers, allowing you to target them with dedicated campaigns to increase loyalty —and overall spend.