Want to Build Profitably? Start with Calculating Customer Lifetime Value – Part 1

What is Customer Lifetime Value?

Customer lifetime value (CLV), at its simplest, is the total expected gain from a single customer. At its most complex, CLV arms you with accurate cost-benefit models that will increase your profitability over the long-term. Companies who are masters of acquisition and retention are calculating CLV and applying their data in ways unseen by most others.

We have broken this topic into three parts with real-world examples to help you learn about this important topic, and put it into practice in your organization.

What the long-term view can do for you

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A primary example of a company using CLV well, despite a recently weakened economy, is Starbucks and their killer loyalty program. Starbucks acquisition and retention strategy is setting an example for what other companies, using the right data, can achieve when executing on the basis of their calculated customer lifetime value.

Using a variety of different formulas ranging in complexity, Starbucks learned the value of their customers, ultimately creating a ceiling for a maximum cost of acquisition.

Do you want to grow your customer base profitably?

Customer lifetime value helps merchants frame their acquisition strategy and marketing budget, which leads to higher average order value and more transactions.

Knowing your CLV will help you plan effectively so you know where your money is well-spent, allowing you to maximize your spend to increase acquisition and retention. Knowing your CLV allows you to invest in your “best” customers now for future business success.

Less than 5% of online stores know their CLV or how to calculate

CLV is a very valuable metric, with the top performing eCommerce companies using it to drive revenue and loyalty successfully. Netflix uses CLV to know exactly how much to spend on each customer, and keep customers coming back for more without wasting time or money. Simply put If Netflix hadn’t calculated customer lifetime value, they wouldn’t be as big as they are today.

Ignorance is not bliss in eCommerce

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In our experience, many companies don’t know their CLV or even attempt to calculate it.

We aren’t alone in this observation. Our friends at Sweet Tooth Rewards report that less than 5% of online stores know their customer lifetime value. Calculating CLV isn’t as complicated as you think and a lot more accessible than a quick Google search shows. Calculating lifetime value and implementing strategies based on it equips you to increase customer loyalty because you can justify the investment in retaining them, and therefore invest more in them intelligently.

Refusal to understand the lifetime value of your customers is detrimental to your business. You try your hardest to earn the loyalty of your customers, why not work more efficiently and effectively by first calculating your customer lifetime value? We can make CLV easier for you to understand so you can improve your eCommerce business. Many companies will use multiple formulas to calculate, we’ll walk you through our top 3 ways to calculate.

The 3 Ways to Calculate CLV

  • Simple and inexpensive – but not that accurate
  • Inexpensive and accurate – not that simple
  • Accurate and simple – a little expensive

Stay tuned for an in-depth look at the customer lifetime value formulas and their uses on the blog next week. Sign-up below to be the first to receive part 2 of our post to your inbox!