Here's what CLV is and why it could be your most important metric.
Although it may not seem like the most interesting metric, customer lifetime value (CLV) is essential to the success of your e-commerce business. It truly has the ability to take you to the limit. As the pieces of a well-built machine, every customer in your online store has their value. And this value is crucial to your company.
CLV can safely be called the most complete metric for analytics. New customer rates, costs per order, customer retention rates, conversion percentages and many more are important to your future revenue, but CLV combines all the important statistics of every individual customer. It is simply the expected profit you get from each customer in your business. With proper calculations, you can easily grow your e-commerce business with this metric. You won't be losing money, because you will know exactly how much you earn.
2 types of CLV
Without further ado, let's look at the two distinctive ways to calculate CLV for your company.
Historic CLV is acquired simply, and it is more accurate when it comes to raw numbers. It is the total profit from previous purchases a customer has made. This includes all expenses associated with the purchase of a product.
Predictive CLV is tougher. In essence, it is more useful to your business because it enables future planning. Predictive CLV relies on existing transactions, but they are mixed with behavioral variables. Each new purchase, along with behavioral data, enhances the predictive CLV. The numbers will change, and you will need to adapt to them. The good thing is that more data means more accuracy. So, in the long run, predictive CLV will give you more benefits.
How does CLV affect your business?
Let's say it this way – your future revenue depends on the lifetime value of every customer. It shows how much they will spend and how valuable they are to your e-commerce business. A higher CLV means that you have more loyal customers. You get repeat purchases from them, they like your products, and they will tell their friends about your online store. If this is the case, you can expect healthy levels of income. As a bonus, you can safely state that you are good at customer retention.
Why do you need CLV awareness?
Even the most successful businesses start from a single point – acquiring that new customer. You may spend $100 to acquire them, or the number may border with $0. It is up to you and your social media strategies. However, you can't escape the initial cost of bringing in a new customer.
One of the fundamental laws of e-commerce states that you'll probably lose money on these first sales. This is understandable and acceptable. The part that comes next is what defines your business as a success or not.
CLV draws the line between a successful growing business and a total failure. Long-term customer retention strategies need to aim at increasing CLV. If you manage that, you can expect a higher ROI.
Working toward better CLV includes sensible planning in one direction – negating the initial costs of acquiring a customer. Each repeated buy from an existing customer takes you one step closer to the promised land.
Let's look at seven essential reasons why CLV is important to your business.
1. It's a partner for the long run.
CLV is not your usual e-commerce metric. You don't need to track it every single morning, but neglecting it will bring you down faster than you think. It aims at the growth of your e-commerce business and the financial health of your company. It is engraved in your path to success and satisfactory revenue.
2. It aids client relationships.
As you may guess, weaker client relationships equal fewer repeat sales. If you don't have an engaged core of loyal customers, you are doomed to a low CLV.
Increasing customer retention depends mainly on understanding your customers. If you adapt to their purchasing habits, you will see a rise in overall CLV. Customer engagement is a must in e-commerce.
3. It's a judge for product quality.
Low CLV screams of two possibilities – your customers are unaware of your product benefits, or your products simply don't work as you thought they would. Both cases make for unhappy customers, which translates into fewer sales.
4. It helps you budget.
Knowing how much you receive from a customer lets you know how much to spend. Be it for acquisition or retention, CLV shows you how much you can afford for different customer campaigns. Increasing CLV opens new investment opportunities for your business. You can grow and expand safely if you know your budget limits.
5. You can find the most valuable customers in your business.
The catalyst for repeat purchases is knowing your customers. CRM checks let you track down customers who spend a lot. Simple research will let you know what they spend the most on. This enables you to promote a certain product more than others.
When you prepare your customer retention strategies for those customers, you will draw similar types of consumers to your brand. You will be able to cater to valuable customers with individual customer support and exclusive promotions too.
6. You'll see positive margins.
If you think that loyalty erupts from massive discounts, you are mistaken. If you rely on discount for your sales, you are bound to lose customers when you end a promotional sale. If you work on your brand image, however, you can expect your customers to stick.
Loyal customers are impressed by quality products, brand values and story, not discounts. This benefits you, as you won't need to search for their attention with forced offers, and you will earn the full price of every product.
7. You can reinvest and grow your company.
A setback for small e-commerce businesses is the lack of funds to develop and expand. If you work on steadily increasing CLV, you will surely reach the point of "hey, we have enough money for this move!" After all, isn't e-commerce business about growing, reinvesting, expanding and bringing more quality products to your loyal customers?