What is customer lifetime value?
Let’s start a bit broader. When you’re trying to gauge how your business is doing, you’ll need to keep track of several important measurements, called Key Performance Indicators (KPIs). You can use lots of tools to track, grab and report how you’re business is doing, including Shopify Reports, Google Analytics and reporting from any integrated service you use, like MailChimp [P.S. Read this post about getting started with analytics].
One KPI that helps you measure success is customer lifetime value (LTV). This number indicates how much an average customer will spend over their course of business with you. Stores with customers who are loyal to their brand, buy consistently and spend higher amounts have strong LTV.
Customer Lifetime Value for an individual customer is basically measured by taking how much they’ve spent in total, and subtracting how much it costs to get them to purchase (like ad money, the value of the time you took to market to them, etc). Your company’s LTV is an aggregate of all of your individual customers’ lifetime values, and averaged out.
And why is it a big deal?
Some people say LTV is the most important metric you’ll use (hey, I’m not the only one I swear). High Customer Lifetime Value means a few things about your company:
Spending less money on constantly searching for new customers
You have to spend money on getting new customers, whether it’s paying for a Facebook ad or the value of time it takes to pitch to new groups. If you’re constantly hustling to get new customers, who then buy one thing and never come back, you’re not being very efficient.
A high customer lifetime value generally means you’re doing a good job at retaining customers. The more you get your customer to come back, the less you have to spend on acquiring new ones, resulting a higher ROI. Even if it takes giving someone a 10% discount, it could be less than what you’d spend on a new marketing campaign.
Your best PR team
Customers who are loyal, and keep coming back to your brand, are not just increasing your sale value directly -- they’re your best PR team. Because so many people trust recommendations from other users or their friends, developing a relationship with your customers that leads to trust and loyalty means they’re the ones who are spreading the word.
Customer lifetime value can help indicate loyalty. If you’re building a brand that keeps people coming back and referring their friends, you’re likely to be a stronger business that has a competitive edge over your competition.
How do you increase your customer lifetime value?
Get your calculations hat on
First, you have to start by calculating what your LTV is. It can be a bit complex, but I found this straightforward LTV calculation guide really helpful.
Here’s another one that’s good for back-of-the-envelope calculations, but you’ll still need to know average order value and how much you’re spending per customer acquisition. You can generally find the metrics you need on your Shopify Reports.
Finally, this guide from Shopify has a method that will take some spreadsheeting, but avoids big algorithms and anxiety attacks.
You can also use some outside calculators to measure how well you keep your customers coming back. See how well you’re retaining customers right here.
You’re on the clock
Research has shown that customers are most likely to come back if they repeat purchases within the first 90 days. If they’ve not made a second purchase by then, they’re likely to forget about you and move on. Doing a major push for repeating a purchase within the first week, month, or three month benchmarks can go a long way in improving loyalty.
These kinds of “pushes” often happen through email marketing, or even through social proof. You can try to encourage previous customers to rate your service, post product videos and other user-generated content, give your product as a gift, refer their friends. or join your loyalty programmes.
Repeat Purchase Rate and Average Order Value
There are basically two ways to get to a CLV -- increasing the frequency that a customer is making a purchase, and increasing the amount they’re spending on any one purchase.
Repeat Purchase Rate comes from the number of times a customer comes back, or how loyal they are. To increase your RPR, you can focus your strategy around loyalty programmes, building in subscription models, and incentivising customers to come back with discounts and offers.
On the other hand, you can design your strategy around increasing the amount any one product is worth. This happens through upselling, product bundling, adding value to your products, personalising your offer and building a high-end brand.
Take a look at Tiffany’s, a well-known high-end jewellery store, for example. Even their tin cans are ridiculously expensive. Their strategy has been to make a really high average order value. If a customer is buying one or two things in their life, their CLV is already quite high. But, they’re also not getting customers who would spend significantly less on any one product and might come back every month or do all their holiday shopping there.
Of course, lots of businesses will want lots of high paying customers who come back again and again. The risk you run by only catering to the high end is 1) it’s boring and 2) you’re losing out on a lot of potential customers who might not have the money or be willing to spend on big-ticket items, but might be great customers anyway. For brands with some flexibility, consider offering a range of products that tailor to multiple ends of the spectrum.
Bonus reading: Shopify’s got a great quick guide to pricing strategies for increasing LTV.
Do some segmenting
If you’re a number-cruncher, it can be really useful to look at LTV in smaller chunks, rather than either individual customers or your whole business. Breaking your customers into segments by demographics or interests can be helpful to identify and target your best and most loyal customers. You can use a CRM (check out this article), or even MailChimp and Klaviyo, to break your customers into smaller groups and take a closer look.
Talk to us
We’re here to help. If you’re looking for support designing a business strategy that increases your customer lifetime value, or if you need help getting the numbers on the table, talk to us about it. Looking for more reading on Customer Lifetime Value? Check this post out.