When it comes to eCommerce, customers are rarely seen as simple once-off sales.
They are seen as investments.
And we’d like to think that investments are a little like friendships. If you don’t put in the effort, then it’s not going to last.
Sadly, this is where many online retailers get it wrong.
They’re stuck running up expenses on a misconception treadmill, thinking that constantly acquiring customers is the only way to go.
If you want a sustainable business, you must learn how to improve customer lifetime value for your brand.
But customer acquisition costs (CAC) do add up, and in eCommerce this is usually seen in ad spend.
The solution seems simple: cut expenses to boost profit.
This is where practices in customer retention come in. However, you don’t just want to retain any kind of customer.
You want to retain valuable customers.
Essentially, these are the people you’ll get more out of in the long term.
We call this the customer lifetime value. And it is an important metric for any growing business, as it considers sustainable return on investments.
Interested in finding out how to improve customer lifetime value? We can help.
What is Customer Lifetime Value?
Customer lifetime value is a metric that indicates how much a customer spends with you over the period of time they engage with your business.
As an online retailer, you would thus try and predict how long said customer would be involved with you and compare that against a customer’s revenue value.
Simply put, the lifetime of a customer becomes more valuable the longer they continue to make purchases from you.
How to Calculate Customer Lifetime Value
The lifetime value calculation is a pretty simple formula.
However, it hinges off the calculation of a few other metrics first.
- Average purchase value = total business revenue / amount of purchases
- Average number of purchases = total purchases / number of customers
- Average customer value = average purchase value / average number of purchases
- Average customer lifespan = sum of customer lifespans / number of customers.
The customer lifetime value is thereafter calculated by multiplying the average customer value with the average customer lifespan.
Below is another way to look at the lifetime value calculation.
You may be thinking that’s a lot of math.
Of course, since these metrics are so important, there are tools that can help simplify the process.
Why not try a customer lifetime value calculator?
Alternatively, consulting a guide on lifetime value calculation is not a bad idea if you need some examples to deepen your understanding.
Importance of Customer Lifetime Value
As useful as it is to know your customer lifetime value, few companies seem to realize its importance.
Did you know that only 29% of businesses with lowered/static revenue actually think this metric is important?
Compare that to 55% of companies showing profitable growth who have come to rely on its use.
What are their reasons? Let’s break down a few.
Cutting Customer Acquisition Costs
Getting new customers is expensive. We’ve mentioned this before.
The cost of customer acquisition in ad spend can seriously dig into your available profit margins.
In comparison, a study has shown that profit margins start climbing anywhere between 25-95% based on just a 5% increase in customer retention!
Another reason to nurture the valuable segments of your customer pool.
Boosts Customer Loyalty
Consistency is key when you want to retain customers.
That means continually providing quality in your services, products, and investing in the customer journey.
Companies who optimize on their customer lifetime value apply this consistency.
The outcome is more loyal customers with a lowered churn rate.
Strategize to Target Valuable Customers
The most clear cut benefit of customer lifetime value is the knowledge of which customers spend the most in your online store.
This allows you, as an eCommerce retailer, to target your customers with the greatest long-term value, who will continue to remain profitable for the longest time.
With this metric, you’re on your way to more refined audience segmentation.
After this, your customer support teams can better craft the customer journey based on interests of your engaged customer segments.
How to Improve Customer Lifetime Value
It is clear that you need to focus on your existing pool of profitable customers, and in so doing maximize on their value over time.
Here are a few approaches you can take to boost the lifetime value of your customers.
Improve Customer Onboarding
First impressions can count a lot towards how a customer perceives your brand.
That is why you want to maximize on your strategy of setting up the buy-ins of what you have on offer.
Your main goal is getting customers to become familiar with your products and showcasing the potential payoffs they would have in placing an order with you.
How do you do this?
- By being straightforward about your product relevance, and
- offering a walk-through of your brand and your available range.
If done right, this offers your customers an incentive to return to your brand again and again, because you’ve focused on building a relationship of trust.
Keep up Customer Engagement
Your customer lifetime value is all about relationship building.
It’s the needs of a customer that drives them to spend money. However, you need to think how you can keep their attention once that need is fulfilled.
That’s when the relational work starts.
Here are a few practices to keep in mind:
- Check in regularly—to stay front of mind with your customer, you have to stay in touch, and make it easy for them to reach you.
- Social media measurement—listen closely to the conversation people are having about your brand and extract their expectations from social media platforms.
- Assimilate customer feedback—Make your customers feel that their opinion matters by gauging their input on your product and implementing the changes that will keep them coming back.
- Reward programs—boost customer loyalty by giving them incentives for repeat purchases, while making sure these milestones are achievable.
Maximize Order Value
To gain tremendous growth as an online retailer, you need to be scaling properly to allow you the ability to expand without being hampered.
One way to do this is to have a good backend, where you have strategized to increase the overall value of your orders.
There are two ways for you to do this:
- Upselling—convincing a customer to upgrade their current order to a higher-end deal with more value.
- Cross-selling—where the customers are offered products that complement the current order.
Want some tips on applying this approach in your business? Check out the video below.
Here is an example.
If you sell a training course for $1 000, there comes a point where you may reach a high profit from its sales, but the demand may be so high that you actually need someone to help you present it.
This subtracts from your profit. In addition, there will be a CAC attached to constantly get people to do the course.
Instead of selling another course and spending more money to outsource the work needed for it, you could sell an agency service for another $500 to people doing the course.
That is an upsell.
And because there is no cost to advertise/cost per acquisition, you are making more profit from the same customer.
Underpromise and Overdeliver
Customers like the element of surprise, given that surprise has a decent payoff.
It’s all about managing expectations, making sure you understand and control the mental investments they make with regards to your products.
When it comes to brand promises, many businesses oversell their worth, without being able to act on their guarantees.
You can improve your customer lifetime value by avoiding this pitfall, and instead set more reasonable expectations that you could possibly outdo with excellent service.
For example, you could set the delivery date of an order at 10 days from its placement.
Here, you may have taken into consideration:
- supply chain management,
- shipping, and
- any delays in order processing.
If everything runs smoothly, you could potentially have the order with your customer five days ahead of schedule.
BONUS Strategy: Customer Perks
By now you know it’s important to craft a value-adding customer journey, starting with onboarding, and following through with continued engagement, optimized customer service, and the effective management of expectations.
But it’s likely that many successful businesses are already applying this formula.
So how do you stand out from your competitors?
Think of taking some of the following tips to heart:
- Make your customer rely on you—Solve a problem for them, but to the extent that you become irreplaceable
- Be the main convenience—Minimize the time customers spend on using your service and maximize the enjoyment they get from your product. Automate your features and speed up your responses.
- Serve the right audience—Instead of offering equal value across your platform, think of offering outstanding value to your most engaged segments.
- Support customer interests—Find out what your customers are passionate about and consider sponsorships or giving them incentives to become advocates.
Airnbnb takes a different approach below, in celebrating their customer in ways that could help them with self-promotion.
The Benefit of Email Marketing
We know that a lot of your business success rides on your interaction with a customer.
The reason why email marketing is so crucial in terms of your business strategy, is that a customers converted to your mailing list will ensure massive cuts on your CAC.
This will allow you to scale profitability.
And with the right consultants, we at KAMG can help show you how to increase customer lifetime value so your brand remains profitable for many years!
Get in touch now, and we’ll help sustain your long-term customer relationships.
What is considered a good customer lifetime value?
CLV is usually measured in relation to CAC, and in doing so your business would see how long it takes to regain the investment made to get the customer. Thus, a good average would be to have your CLV be three times that of your CAC.
How do you build customer value?
While you may read up on tips to improve value for your customers, a few unique mentions are to focus on:
- How your brand is perceived,
- Highlighting your strengths, and
- Educating your customers on your service and products—including how they are used.
How do discount rates affect CLV?
Customer revenue will decrease over time, since it is discounted every year. This means a decline in customer lifetime value, since there is less revenue annually to make a contribution to CLV over a certain number of years.