‘Customer Lifetime Value’ (CLV) is the metric all businesses should be tracking. Especially those in ecommerce. Here, we’ll break down what CLV is, what it means to your business, and how you can use lifecycle marketing strategies to really get the most out of your customers.
Slow and steady
We’ve all heard the tale of the tortoise and the hare, and the old adage ‘Slow and steady wins the race’. With the right interpretation, this is sound advice for most businesses.
What this parable tells us is that we should keep our eyes on the prize. To look ahead, and not fall for the instantly gratifying things like that silly old Hare did. Naps in warm bales of hay (or, more relevantly to ecommerce; gross profits on individual, initial purchases) can take our eyes off the bigger picture.
The tortoise on the other-hand? Well he kept steadfastly plodding along until he reached his goal.
Now that doesn’t mean we should avoid short-term gains entirely, (there are plenty of opportunities you should definitely take). What it does mean, rather, is that we need to ensure we’re seeing the forest for the trees.
And that’s where Customer Lifetime Value comes in.
Customer Lifetime Value
CLV is the average total spend for your customers. It’s a calculation of what the average customer is worth to your business across all their purchases and interactions. If you’re doing things right, a large portion of your sales should be repeat business (this is where Lifecycle Marketing comes in) and therefore your CLV should be a much higher figure than just an average purchase.
In short: CLV is the long game.
There are a few different ways to calculate CLV. Many businesses take into account all kinds of factors, however, for ecommerce (and the brevity), let’s keep it simple for now.
The basic calculation would be:
(Average Annual Revenue Per Customer ✕ Average Years of Customer Relationship) ﹣ Cost to Acquire a Customer = Customer Lifetime Value
Depending on your ecommerce platform, you should have no trouble calculating these figures (feel free to get in touch and we can show you how).
So why is tracking this important for your marketing? Well, once you know how much each new customer is worth to your business, you’ll be able to properly calculate your marketing and sales budgets. It’s just like a game of chess; you need to know how many pieces you have on the board before you can properly execute your strategy.
Getting more customers
So now we know our CLV, let’s put it to use.
Yes you need a budget for attracting new customers – but don’t fall into the trap of limiting your lead capture to less than the profits on a single purchase. Remember: it costs between five to twenty five times as much to acquire a new customer than it does to retain an existing one. You’re going to have to spend big on lead capture initially, but if you know your CLV, this is easy to justify.
For example: ‘Loss leaders’. This is a highly effective strategy for attracting new clients – but one that goes largely underutilised in ecommerce. The idea is, you ensure your initial offer to a prospective customer is one they can’t refuse. You might not make any money on your first sale, but you’ve gained a customer. Now you have a far greater chance of selling to them again. And again.
Knowing your CLV allows you to calculate exactly how great an initial offer you can make. Couple this with some Lifecycle Marketing strategies to boost your repeat business, and you have a recipe for maximising profits.
Retaining customers with Lifecycle Marketing practices
Now you have your customer – it’s time to make sure you keep them (and maximise your CLV in the process).
It’s important to remember that depending on your level of service, product offering, and many other factors, your CLV is going to fluctuate.
Luckily, this fluctuation can be herded very much in the right direction with Lifecycle Marketing practices. We’ve dropped that term a few times throughout this post – so if you aren’t already across the concept we strongly recommend checking out our free e-book on the topic.
You might also like to see how these methods have helped some of our previous ecommerce clients. Jump on over to our case studies and have a look!