Do you use customer lifetime value (CLV) to maximize profits?
This guide covers not only how to calculate CLV, but also the inherit challenges in adopting it as a KPI for eCommerce stores. Further, we showcase customer lifetime value best practices, including how to improve CLV with examples from best in class eCommerce stores such as Amazon, Sephora, Nordstrom, and more.
If you're already familiar with CLV basics and would like to skip straight to the best practices and examples, click here.
What is customer lifetime value (CLV)?
By definition, customer lifetime value is the total revenue a customer is expected to generate for your business while they are a customer.
Customer lifetime value is also known as lifetime value, and can be abbreviated as CLV or LTV. As a key performance indicator, customer lifetime value has increasingly been adopted as business models have emphasized retention and repeat purchases over transactional exchanges.
It is essential in calculating other KPIs such as return on marketing investment (ROMI).
How do you calculate lifetime value of a customer
As we will see, calculating customer lifetime value should be dialed in to your specific business.
However, the traditional way to measure CLV is to take the expected average order value multiplied by the expected purchase frequency per year multiplied by the number of years you expect to a customer to remain a customer.
More complete approaches would then subtract out the acquisition costs of acquiring the customer.
Problems with traditional CLV metrics
In practice, CLV carries a number of challenges for eCommerce stores looking to use it as a KPI.
A better way to calculate customer lifetime value (CLV)
The major challenges with CLV are due to the timeframe.
The solution is to shorten the timeframe. Shift away from "lifetime" and instead focus on shorter payback periods.
Payback period analysis is more practical, and still allows for longer CLV calculations.
Simply put, payback period refers to the amount of time it takes for a customer to generate enough profit (value) to cover the cost of acquisition (CAC).
For eCommerce stores, CAC is a constant factor, and as we discussed in our post on conversion rate optimization, CAC is rising across industries.
Limiting CLV to a shorter time frame makes the metric more actionable. Changes in make in personalized offers or triggered email campaigns, or any other tactics you use can be evaluated in true AB testing fashion.
Instead of measuring customer lifetime value as one metric, break it out into various periods depending on your product and industry's specific purchasing cycles. For many consumer products, this number will be 30, 60, or 90 day cycles.
How to increase customer lifetime value (CLV)
Simply knowing your CLV metric is not enough. You want to be able to use it as a gauge for how successful your retention and repurchase campaigns are.
Below are a series of best practices we've helped clients implement. We also include examples and screenshots from top eCommerce companies in the world.
1. Gain permission to re-engage customers
The first step in improving customer lifetime value is getting permission to communicate with clients.
We covered the concept of permission based marketing in our guide on customer relationship marketing.
New customers typically aren't excited to
2. Optimize post-purchase email sequences
Post purchase emails present an incredible opportunity to increase CLV.
According to data from Unific, order confirmation emails see almost a 7x open rate as other marketing emails. Likewise, these emails have almost double the click through rate and generate nearly 6x as much revenue
These open rates give brands a great opportunity to set expectations and add value. Best practices here include
In our own study on email marketing statistics, we found that post purchase emails are able to generate significant conversions.
3. Incentivize repeat purchase with in-store rewards and currency
Instore currency is an excellent tactic to spur repeat visits.
Below, Kohl's does an excellent job incentivizing repeat purchases through their loyalty program.
Kohl's set's a hard expiration date on their rewards, giving a clear reason to come back to the store and manufacturing urgency for their customer base.
4. Create personalized offers based on past customer behavior
Once a visitor begins interacting with your brand, you have the opportunity to create personalized customer journeys.
We talk about creating relevant, personal offers a lot here. We truly believe it is the single best way to improve the customer experience and increase profits.
One of the personalization pioneers is Amazon. From the first interaction, Amazon does an incredible job of personalizing every step of the customer journey and is a master at promotional offers.
How Amazon leverages personalized offers in transactional emails
Below, Amazon uses complimentary product recommendations embedded in their post purchase email.
As discussed above, these emails have much, much higher engagement than typical campaign emails. Notice the personalization, from the subject line to the embedded product data, to the personalized product recommendation widget.
How Amazon uses personalized promotional offers to drive repeat purchases
In addition to personalized product recommendations, Amazon uses personalization in their promotional offers.
On site and across channels, Amazon promotes thousands of promotions including
5. Layer in an omnichannel strategy to keep in contact with customers.
While emails remains the default channel during the purchase and post purchase communication process, it is increasingly difficult to reengage customers via email.
In response, brands should create and execute a clear omnichannel strategy to drive repeat purchases. This includes gaining permission to communicate via SMS, Messenger, social channels, or any other modes of communication that make sense in your industry.
There are many great omnichannels stragies to learn from. Below is a great example from Sephora. This offer is included as part of their loyalty program onboarding program.
Another example comes from Nordstrom. Here they use Instagram to help inspire shoppers and allow in-app purchase to increase CLV.
Understanding how to improve customer lifetime value is the first step. The next is to take action.
To do so requires partnering with a personalization partner who can identify customers at an individual level, and present relevant offers.
If you are just starting to look at personalization, I recommend our guide titled "How to Select a Personalization Vendor". It covers the major questions you should ask and capabilities you need to be successful.
Barilliance is built to help eCommerce brands successfully segment their customers and create personalized offers for them. If you'd like to discover how Barilliance can help you increase CLV, request a live demo here.