What is customer lifetime value (CLTV)?
JP Arnaud-Marquez
·August 9, 2022
When you run an ecommerce business, one of the most important metrics to focus on is customer lifetime value (CLTV).
That’s because the higher your CLTV is, the less you need to focus on customer acquisition – a high CLTV is a sign of satisfied, loyal customers who will return to your brand again and again.
So how do you measure your CLTV, and what can you do to make it even higher? Let’s take a look.
Measuring your CLTV
Simply put, your CLTV is the measure of how much revenue you can expect to earn from each customer during the course of their “lifetime” as a customer.
For some customers, this may amount to a single purchase – but the goal is to generate a stream of recurring revenue from loyal customers who’ll keep coming back again and again for years to come.
To calculate your CLTV, you can divide the monthly average revenue per customer by the percent of customers who churn, or stop purchasing your products over a certain period of time.
For example, if your average revenue per customer is $150, and your churn rate is 13%, then your total CLTV might be $1153.84 – that’s the total amount you might expect to earn from your customers in general for the period that they shop with you.
Chargebee offers a helpful Excel spreadsheet to help you plug in the numbers for this formula.
Why your CLTV matters
Obviously, some customers will spend much more and others will spend much less, so the CLTV only represents an average – but it can still help you to determine how much each customer in general is “worth” to your brand in terms of revenue generated, so that you can make better decisions about how and where to market for new customers.
You’ll also be able to segment your customers so that you can explore which variables point to a higher or lower CLTV. For instance, you might find that customers who come to your brand via a Cyber Monday promotion are more likely than others to churn – but customers who find your brand via affiliate marketing are likely to generate a higher CLTV than your average.
Overall, your CLTV can help you understand the health and longevity of your brand. You know that you can acquire new customers by throwing money at all of your advertising channels – but if your customers churn quickly, you’ll need to keep throwing money at advertising to bring in more customers, and it’s not going to remain a sustainable strategy.
By fostering customer loyalty in a way that encourages customers to buy from your brand again and again, and refer your company to their friends and family, you’ll be able to increase your CLTV and improve your brand’s financial sustainability, setting you up for long-term success.
Diving into your data and generating insights will help you understand which factors go into helping you generate a high CLTV for certain segments, so that you can invest more in those marketing channels or demographic profiles, and identify which strategies are working to encourage higher retention.
With a high CLTV, you’ll be able to reduce your spend on marketing to new customers, and increase your profit margins by continually selling products to a stream of loyal returning customers.
If your CLTV isn’t where you’d like it to be, don’t worry – there are plenty of opportunities to boost it.
How to boost your CLTV
Increasing your CLTV starts with analyzing your data, and optimizing your marketing strategy accordingly to identify target customers who are likely to stick around – and building a best-in-class customer experience across every touchpoint with your brand so that your existing customers remain loyal.
Here are a few guidelines:
- Segment your customers to find your best target demographics
When analyzing your data to identify which customers spend the most consistently over long periods of time, look for what they have in common. Did the majority of them come to your brand via referrals or affiliate marketing? Are they based in cities, v. rural areas? Do they have a household income over $150,000? Whatever their common variables are, look for opportunities to find more customers like them by narrowing your targeting criteria to match their profiles. - Provide loyalty program benefits to your existing customers
In order to reduce churn and increase CLTV, it’s important to give your existing customers incentives to continue shopping with your brand. By offering a digital loyalty program, you can provide customers with loyalty points for each purchase, as well as other actions such as engaging with your brand on social media or sharing a link with a friend. Customers can redeem loyalty points for discounts, free products, or other perks like exclusive offers – ensuring that they feel valued by your brand, so that they’re not likely to look to one of your competitors. - Optimize for exchanges over returns
One major source of customer churn is when a customer sends a product back. Especially if this is their first experience with your brand, they’re not likely to give you a second chance if the first purchase didn’t work for them. But by providing a great returns experience that encourages them to exchange the product for something new, you can reduce churn and increase your CLTV. By using a returns management solution like Loop, you can provide a self-service returns experience that provides personalized recommendations for exchange options, based on the customer’s reason for returning an item – if a product was too small, they can seamlessly exchange it for the next size up.
You can even offer bonus credit to incentivize the customer to consider a different item in your store if they don’t want a different version of the same product. By optimizing for exchanges, Loop customers are able to retain an average of 40% of revenue from returns – and increase their average CLTV by stopping customer churn in its tracks.
CLTV is an important metric for ensuring your business’ sustainability and measuring your customer satisfaction. To learn more about how Loop can help, check out a demo.
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