Customer lifetime value is among the most crucial e-commerce, KPIs. It gives a long-term and financially viable view of the company. A high CLV is a sign of brand quality, brand recognition, and ongoing sales from previous clients. If eCommerce companies want to experience steady growth, it is advised that they analyze and maximize client lifetime value. The average CLV for eCommerce businesses is $168, naturally varying greatly across categories. In this article, we are going to learn about customer lifetime value in an ecommerce business.
What is Customer Lifetime Value?
Customer lifetime value (CLV) is the total amount of money an online retailer makes from an individual customer over time. It considers all of their previous orders. It is a useful metric for gauging client satisfaction, brand survivability, and customer commitment.
Depending on the data you have provided, there are two methods for determining CLV.
1. The accumulated data approach
This approach is far more efficient if sales consultants have stock market data. To obtain each customer’s actual CLVs, it combines all of their orders as an individual. Some digital commerce analytics systems may take this available information by the client back to day one if your company has been in operation for just some time and you have just decided to start tracking customer lifetime value. The equation would be as follows:
1st Order + 2nd Order + 3rd Order = Order n (where n is the number of orders).
2. Using an average estimate
If you lack specific data, you can calculate an average using the formula below:
n x AOV x CLV
The average order amount and the typical number of purchases you obtain from every customer are taken into account. If you are just starting your e-commerce business and merely have customer service data at this time, this method provides you with an estimate.
Defining the Importance of the Customer Lifetime Value
CLV is the foundation of financially secure eCommerce businesses that may expand naturally and sustainably. This is so that the advantages of greater ROI and unit economics can be repeated over time through CLV.
In this section, we are going to talk about the importance of customer lifetime value in great detail.
a. It has a greater influence on the bottom line.
If sales consultants simply focus on conversions and rely on bringing in new clients, you will continually incur acquisition costs while earning a reduced profit on each transaction. By generating recurring business from consumers you’ve already gained, you can avoid paying for them again by optimizing for CLV. You would receive the whole profit margin, trying to make up for the CAC you originally paid. Your ROI rises as a result.
b. It enables you to attract more of your ideal clients.
You can create a separate acquisition budget if you anticipate that a customer will eventually spend $100 with your company rather than just $10. Spend more than that to target the ideal target market for providing high-quality customer service.
c. It enables growth.
You can put more money back into expanding the company if your margin is higher. With the assurance of regular revenue, it is easier to expand internationally, create new goods, or hire sales consultants.
d. It implies that consumers adore your company and its goods.
Customers who shop with you frequently have a high client lifetime value. Your goods must be of good quality and durable because they appear to be pleased with the experience and quality. Most significantly, they are loyal to the brand, which gives you an opportunity to go even further.
Customer loyalty, contentment, and customer retention all contribute to customer lifetime value. It is the financial gain from retaining consumers. High CLV eCommerce companies benefit from reliable cash flow and can expand more independently of advertising expenses. It will help you in improving the customer service to a greater extent.