What is Customer Lifetime Value?

In E-Commerce, Customer Lifetime Value is a metric that reflects the value of a customer to a business. The value stretches over the entire course of that customer’s relationship with the business, totaling how much they spend from their first purchase to their last.

Customer lifetime value is based on revenue and helps show tangible information regarding customer loyalty. As a business owner, this metric can help you generate additional revenue by focusing on increasing the value of customers you already have. This is typically more cost-effective than spending money to acquire new customers.

How to calculate Customer Lifetime Value

Studies show that while customer lifetime value is extremely important to businesses, only 42% of companies know how to calculate it for themselves. The calculation isn’t simple, but if you are tracking the right information you will be able to do it yourself. You can use this calculator from the Harvard Business Review to determine LTV.

You can also simplify this for your business with the following steps. Locate important customer touchpoints, measure the revenue at each touchpoint, and add this together for the total lifetime of your customer. This can give you a quick idea of where you are now and help you create goals for the future.

How to increase Customer Lifetime Value

While it can be measured with a calculation, Customer Lifetime Value is something that can be nurtured in many different ways. A great way to increase LTV is through creating strong customer relationships. Doing so will create a better customer experience and will help improve the LTV over time.

Learn how to cross-sell and up-sell

Cross-selling and up-selling to existing customers can be beneficial tactics because they’re already familiar with your business and are more likely to purchase than somebody new.

As customers get near the end of their journey, recommend products they may be interested into continue to your relationship and provide them with value. Any purchases customers make as a result of this strategy will contribute to the LTV.

When implementing this tactic, it may be useful to frame your recommendations as helpful. You could make these recommendations via email using previous purchases and say things like “here are some more products we think you’ll like!” or “based on your last purchase, you make also like these.

Help unhappy customers

When customers are unhappy, you are more likely to lose them. When this happens, the lifetime (and therefore their value) with your business will be cut short. In order to make the most of customer relationships, you should do everything you can to create the best possible experience. When a customer is unhappy, intervene before the relationship is lost. By remedying a negative situation you can impress your customer and create loyalty. While this may cost money in the short term, it will save you money long-term.

Utilize social media

Social media has a strong impact on how customers see your brand. The way you interact, respond to, and engage with your audience says a lot about your company, and customers are receptive to this. Make sure you are responding frequently and thoroughly. Address issues with kindness and do everything possible to accommodate customers’ needs. When other audience members see this, they will feel more comfortable committing to your business because they know they will be taken care of.

Provide clear customer communication

When customers purchase from you, they should know what’s coming next. Make sure customer communication is extremely clear and provide information regarding next steps. This can include order confirmation pages, status and update emails, shipping conformations, etc. By creating strong communication with your customers you will be able to cultivate a positive experience for them. They shouldn’t have to put in much effort to find answers to their questions and it should be easy for them to contact your business when needed.

Implement a loyalty program

Incentivize customers to be loyal to your business through the use of discounts and rewards. There are many methods to choose from, such as points systems and loyalty program apps.  These programs will help encourage customers to make repeat purchases from your business in the future. But remember, the experience is the most important part. While loyalty programs are great strategies, they won’t retain customers if your customer experience is subpar.

Reward customers

Outside of your loyalty program, you can continue to reward your most loyal customers in special ways. Create targeted marketing through emails and text messages and consider offering special discounts and sales. These reward loyalty while encouraging future purchases. You can decide what threshold you consider to be your most loyal customers, whether it is those who purchase the most or those who have been purchasing from your business for the longest period of time. Once you identify this group, you can continue to nurture these relationships and give them extra care.

Create a referral program

Another way that you can increase lifetime value is by incentivizing your current customer base to help you obtain new customers. To make a referral program work there usually needs to be some sort of incentive for both the current customer and new customer. You can give discounts, offer reduced shipping, provide free gifts, or implement something different that works for your business. A referral program will increase your original customer’s value and while also creating new customers that are being obtained at a much lower cost than if you sourced them yourself.

Why is customer lifetime value important?

The most important part of customer lifetime value is not the calculation itself, but the relationships you are building with your customers.

Taking time to understand your customer journey and how you can improve each touchpoint they experience with your business will help you to build the best relationship possible. It will also provide the opportunity to notice and address potential problems before you lose a customer. By implementing the practices discussed today, you will be able to retain more customers and increase your Customer Lifetime Value.

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