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ECOMMERCE

How to Calculate your Customer Lifetime Value

JULY, 2022

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CLTV metrics provide retailers with a unique knowledge to make informed decisions across key departments.

Refine your marketing strategy by calculating your Customer Lifetime Value. Insightful and beneficial, this metric will inform willing retailers which of their customers are the biggest spenders, and which customers are likely to remain loyal to them for the longest period of time.

It's far easier for retailers to sell to existing customers than it is to acquire new ones (and much more cost-effective to improve those existing customer relationships).

Ensure that your customers are satisfied with your product or service so that the retention period is long enough to recoup the investment necessary to earn their business in the first place.

Retailers want to avoid their customers churning at all costs if acquiring new business is proving difficult. Arguably the most effective method in mitigating this is by recording your customer's lifetime value (CLTV). This diligent process will help your business acquire and retain highly valuable customers, which yields more revenue over time.

Understanding exactly how to calculate the lifetime value (LTV) of a customer is crucial to understanding how to maximise your ROI in marketing, product/service development, and customer support.

What Is Customer Lifetime Value?

(C)LTV measures the projected revenue from a customer over the lifetime of their relationship with your business. Understanding the value of the repeat business helps determine how much you should invest in customer retention and acquisition.

CLTV metrics provide Retailers with a unique knowledge to make informed decisions across key departments:

Marketing: Calculating the LTV of a customer can help determine whether acquiring new customers will yield a satisfactory return on investment. The marketing strategy is rendered inefficient if costs to obtain a new customer exceed the LTV.

Product Development: LTV metrics can positively influence considerations on how to incorporate customer feedback into product development. Retailers can decide whether it is cost-effective to make sizeable product changes to satisfy maybe one small segment of their customer base's suggestions.

Customer Support: Increasing customer satisfaction is statistically one of the best ways to retain your most valuable customers and increase LTV. According to the Harvard Business Review, it is 5 to 25 times more expensive to acquire a new customer than it is to retain an existing one.

How Is Customer Lifetime Value Calculated?

LTV equals (=) Lifetime Customer Revenue minus (-) Lifetime Customer Costs.

Behold, a clear example: Say one customer purchases £1,000 worth of goods from your business over the lifetime of the 'relationship', and the total cost of sales and service to that customer is £500, then the LTV is £500.

With this information, any subsequent spend in excess of £500 on marketing to acquire a new customer would yield a negative ROI. Retailers are known to typically allocate 10% of LTV (£50 in this example) on acquisition costs. However, start-ups or struggling businesses often sacrifice profit margins on acquisition to build the customer base and improve cash flow. Streaming giants Netflix kept its prices low for years to expand its subscriber base, and it has continually grown revenues by around 30% per year (as of 20**).

In reality, the distribution of customer purchasing behaviour is highly variable. Some may be one-off or infrequent buyers, while others are regular shoppers with a considerably higher LTV and in-turn, generate the most profits.

It's worth noting that that LTV calculations can become more convoluted when incorporating discounts or the likelihood of upselling to loyal customers in the future.

Returning, brand-loyal customers tend to possess higher LTVs and drive revenue, whereas sporadic shoppers equate to less profit, lower customer satisfaction and tend to require an excessive amount of customer service.

How Do Retailers Use Customer LTV?

The likelihood of selling to your existing, loyal customers sits between 50% and 60%, compared to a meagre 5% to 20% for a new customer. Profitable companies actively consider LTV in key business decisions and tend to focus their marketing and customer service efforts on loyal, higher-value customers.

They may dismiss less profitable customer segments that are not cost effective to reach or have little or no likelihood of converting into higher-value ones.

High LTV customers can be simultaneously rewarded & retained by:

  • Offering special pice/shipping discounts on multiple purchases.

  • Creating a loyalty membership.

  • Rewards for new customer referrals.

  • Providing a personalised customer experience.

Although a tad underhanded, businesses such as mobile and internet providers, banks, and insurance companies are renowned for taking the opposite route.

They're able to exploit loyal customers that are looking for a better deal as they know are unwilling to pull up trees to switch to a competitor. All the while, offering the best deals to potential new customers who are shopping around.

Creating & sustaining value for a lifetime

The LTV metric is one that customer support teams can directly influence during the customer's experience. Support reps and customer success managers play pivotal roles in problem solving and providing recommendations that increase customer loyalty and reduce churn.

When it comes to business decisions, you can use CLTV to identify customer segments that are most valuable to the company and target accordingly. It's also crucial to businesses that adopt a data-driven approach. Although, it should be one piece of the strategy jigsaw, rather than the sole focus.

Consumers will provide even more information as they undertake their journey - requesting new features, sharing experiences of competitors’ products and through contacting your customer support teams.

This underlines the importance of data in measuring and eventually improving CLV. With the right approach, you’ll be able to collect that data and transform it into actionable insights.

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Bricks & Mortar Stores vs. Online Retail: How to combine online and offline experiences to improve shopping for your customers

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