Customer Lifetime Value (CLV) is the profit margin a customer brings to an e-commerce business by purchasing products and services over a period of time. Knowing this value allows companies to focus their loyalty strategy on the customers who spend the most money on the brand, who will give them the highest profits. The ultimate goal is to build a strong relationship with customers, investing as little as possible in marketing and engagement. From the Customer Lifetime Value, you can adjust the costs and pricing strategy of your e-commerce business to improve your profitability. We explain how to calculate it and improve it in the medium and long term.
Customer Lifetime Value Formula
As a starting point, the Customer Lifetime Value considers the customer's current value, which they bring to the company today, and their future potential value, their estimated purchases in the coming months or years based on their frequency of purchase. To calculate it, you can use the following formula:
Customer Lifetime Value = (average customer purchase value x purchase frequency) x customer lifetime - acquisition costs
These factors are:
- Average customer purchase value: the amount the customer typically spends on the e-commerce site. Also known as the average ticket.
- Purchase frequency: the number of times the user shops on the same e-commerce site in a year.
- Customer lifetime: the average number of years the customer has purchased products or services in the same store.
- Acquisition costs: the e-commerce business marketing campaign spend to turn a lead into a final client.
If the result is a high value, the customer is worth investment in resource retention, as they bring high profits to the company. This allows you to segment your customers strategically and apply this segmentation to your future marketing and sales campaigns.
Along with the Customer Lifetime Value analysis, you should consider other key values such as customer retention costs, offers or discounts applied to different target markets, or the seasonal fluctuation in the CLV.
How to increase Customer Lifetime Value and increase profits
The key to increasing CLV is to improve the customer retention rate. Once acquired, loyal customers will then make more purchases in subsequent periods. To do this, you can:
- Launch personalised email marketing campaigns
- Launch offers and discounts for specific users
- Drive cross-selling
- Improve customer service
You can use automated dynamic pricing tools to help you offer attractive prices to certain consumers based on their characteristics and market demands. Ultimately, keep in mind that loyalty costs are often significantly lower than acquisition costs. At the same time, the benefits of having a larger group of loyal customers are greater. Therefore, implementing these strategies will lead to an optimisation of the profitability of the e-commerce business.