How to calculate and increase Customer Lifetime Value (CLV)

If you’ve ever asked ‘how much is a customer worth to my business?’ or ‘how much can I afford to spend to acquire a customer?’ then this is the article you’ve been waiting for.

Keep reading to discover how to calculate Customer Lifetime Value (CLV) and why it’s a crucial metric for ecommerce brands. 

We’ll also show you how to increase the CLV of your online store, with examples and case studies to boot! 

Table of Contents

What is Customer Lifetime Value (CLV)?

Why is Customer Lifetime Value an important metric?

How is Customer Lifetime Value calculated?

How to increase Customer Lifetime Value

• Increase Average Order Value
• Improve Customer Retention
• Increase Purchase Frequency

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What is Customer Lifetime Value (CLV) ?

Customer Lifetime Value (CLV, sometimes called CLTV or LTV) is defined as the total amount of money a customer is predicted to spend with a business over the entire duration of their relationship. 

CLV is a more comprehensive way of measuring the customer relationship than a method like Average Order value.

It’s an essential metric that all ecommerce brands need to know to make effective business decisions.  

Why Is Customer Lifetime Value an important metric?

CLV helps you understand the value of a customer - vital information that helps you work out how much you can spend to acquire a new customer and retain healthy profit margins.

If a customer is worth more to you in total revenue than it costs to acquire them (including all logistics, delivery and labor costs etc.), then you’re making money and you’ve reached profitability.

However, if your Customer Acquisition Cost (CAC) is higher than your Customer Lifetime Value, you’re not going to be in business long.

Not all customers are made equal...

The top 1% of ecommerce customers are worth almost 18 times more than average customers.

When you’re able to break down your customer base by high CLV and low CLV, you’ll be able to spend more to acquire the valuable customers, safe in the knowledge that they’ll be extremely profitable in the long-term.

You’ll also be able to reduce the resources you spend on acquiring low-CLV customers, making your marketing more effective. 

How is Customer Lifetime Value calculated?

The Customer Lifetime Value Formula (CLV) is: 

Customer Lifetime Value = Customer Value x Average Customer Lifespan

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We’re going to explain these concepts and where to find the information you’ll need to calculate CLV below, as well as showing you how to increase your Customer Lifetime Value.

To work out CLV manually, you need to carry out four steps:

1. Segment your customers using RFM Analysis.
2. Calculate Customer Value.
3. Calculate Average Customer Lifespan.
4. Multiply Customer Value by Average Customer Lifespan.
   

(TL;DR - use Segments free 14-day trial and we’ll calculate Customer Lifetime Value for you automatically!)

We’re going to explain these concepts and where to find the information you’ll need to calculate CLV below, as well as showing you how to increase your Customer Lifetime Value.

1. Segment your customers using RFM Analysis

The RFM model stands for Recency, Frequency and Monetary Value. It’s a segmentation method used by marketers and online store owners to understand which customers are most valuable to a business.

• Recency is the last time a customer made a purchase. The assumption is that a customer who has bought from you recently is more likely to make a repeat purchase than a customer who hasn’t bought from you in a while.
• Frequency is the number of times a customer has bought in a particular time period. Again, a customer who buys regularly is more likely to make another purchase than one that doesn’t.
• Monetary Value is the amount of money a customer spends within a certain time frame. The assumption is that someone who buys more expensive items is more likely to buy again than a customer who buys a cheaper product.
  

To learn how to calculate RFM, follow the instructions in this article.

Done that? Fantastic!

2. Calculate Customer Value

Once you’ve segmented your customers using RFM analysis, we need to work out ‘Customer Value’.

Customer Value is the average monetary value of each customer and you work it out by multiplying Average Order Value by Purchase Frequency.

Customer Value = Average Order Value x Purchase Frequency

And here’s a quick reminder of what those are and how to work them out:

• Average Order Value - the average dollar amount a customer spends when they complete a transaction. (We explain how to work out or find AOV here.)
• Purchase Frequency - the average number of transactions per customer. Find this by dividing the total number of orders by the total number of unique customers.)

Make sure to use the same time period when doing this calculation. We suggest choosing 12 months. ‍

3. Calculate Average Customer Lifespan

The next step is to find Average Customer Lifespan - the normal length of time a relationship with a customer usually lasts before they stop buying from you permanently.  

Segments customers can use the ‘Churn’ segment to see an accurate estimation, but Shopify recommends choosing a lifespan of three years if you don’t have this data.

Alternatively, follow Josh Wilson’s instructions in this article.

4. Multiply Customer Value by Average Customer Lifespan

Now we have all the pieces we need to calculate Customer Lifetime Value. Multiply Customer Value by Average Customer Lifespan to get your CLV figure. 

Remember that if you don’t know your Average Customer Lifespan, you can use a lifespan of three years, but keep in mind this will be less accurate.

Customer Lifetime Value = Customer Value x Average Customer Lifespan.

So, now you have your Customer Lifetime Value, but why is it important and how do you increase it?

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How to increase Customer Lifetime Value

In short, brands can maximize CLV by increasing the amount of money each customer spends and increasing the number of times each customer orders.

Let’s talk about how brands can:

1. Increase Average Order Value.
2. Increase Customer Retention.
3. Increase Purchase Frequency.

Increase Average Order Value

We went in-depth on how to increase AOV in our ecommerce guide to Average Order Value - check it out for explanations of each method, as well as examples, case studies and the best Shopify apps to help you execute each one.

Here’s a summary:

• Upsells are where online stores incentivize their visitors to buy more expensive items than the one they’ve viewed, added to their cart, or already purchased. 4% of all ecommerce revenue comes from upselling, and that for ecommerce stores it’s 20 times more effective than cross-selling.
• Cross-selling is where ecommerce companies show their visitors a similar product to the one they’ve viewed, added to their cart, or already purchased. VWO suggests that the products used should be at least 60% cheaper than the product originally added to cart.
• Raising prices is the quickest and easiest way to increase your Average Order Value. Even if raising prices results in fewer customers converting, the increased Average Order Value may still lead to higher revenues. Pricing is a critical, but often overlooked, area.
• Bounce-back emails are sent directly after a customer has purchased to incentivize them to buy a cheaper product as well. Pick a product with a low price-point and combine with a limited time offer to show urgency. Use email automation to do the heavy lifting.
• Loyalty programs are incentive-based systems that use rewards to get customers to continue to buy from you over a longer period of time and spend more than your average customer. Customer loyalty research from Loyalty Lion found that customers who were part of a rewards program spent 39% more per order than customers who weren’t.  
• Facebook Lookalike Audiences (LLAs) allow you to reach more people that look like the audience you upload. So make an email list of customers with a high CLV and use Facebook’s targeting option to advertise to them. Growth Cave grew ROI by 44% using LLAs by choosing an audience with a high AOV.
• Free Shipping helps online stores increase AOV by choosing a minimum spend level that incentivizes customers to add more to their cart in order to reach it. NUFACE increased their total sales by 90% by using a prominent ‘Free shipping’ banner on their homepage.
  

How Cellular Outfitter raised Average Order Value by 10%     

Edwin Choi, VP of marketing at Cellular Outfitter’s parent company, Mobovida used the concept of ‘impulse buys’ to increase AOV by 10%. After their first test failed, they realised that different cohorts of customers were using their site in different ways. 

They employed tiered discounts that only kicked in at certain cart sizes for coupon redeemers but not any other customer type, a change which resulted in a 10% increase in sitewide AOV.

Of the experiment, Edwin said: 

‘This single test has added millions of dollars in revenue to our site per year...For us, this test also highlights the importance of testing for learnings instead of wins. When we lost heavily during the first test, our first reaction was not “Aw shucks, we lost. Let’s go for that win!”, it was “Let’s see what we can learn from this” – and the second home run test would not have happened without the first test.’

Improve Customer Retention

There are two main ways to increase the number of times someone buys from you - increase the frequency of purchases they make, and increase the length of time they stay with you. 

Our ecommerce guide’s to Customer Retention and Customer Churn Rate are resources with strategies to increase customer loyalty as well as stats, examples and case studies, but here’s an overview:

1.   Use email marketing to increase CLV

The number one reason most customers stop buying from a company is lack of customer contact.

Email is one of the most effective tools at your disposal when it comes to talking to your customers. That’s why we’ve handpicked 11 email strategies to increase your customer retention rate. Click on each one to see what they are and how to use them: 

1. Birthday, anniversary and milestone emails.
2. Cart abandonment email series.
3. Company newsletter email.
4. MVP customer emails.
5. Post-purchase email series.
6. Product recommendations emails.
7. Repeat purchase reminder emails.
8. Review and testimonial request emails.
9. Rewards, deals and discounts emails.
10. Welcome email series.
11. Win-back campaigns.

2. Focus on customer service to increase CLV

Research suggests that 90% of customers who experience great customer service will buy again from the same company.

Here’s how you improve your customer service:

• Be clear and proactive. Communicate how long deliveries will take using email automation in combination with delivery tracking services. Set appropriate expectations and then meet them. Doing so increases trust, and trusting a brand is important to 4 out of every 5 consumers.
• Fix your mistakes. Reach out on multiple platforms to let customers know when something goes wrong – don’t wait for them to contact you. Make sure you show empathy to their situation and any inconvenience you’ve caused them and offer a fix. More than two-thirds of consumers would be happy to buy again from a company that resends lost or damaged items using fast shipping. This means it’s possible to repair relationships and retain customers, if you act fast and decisively.
• Go above and beyond to delight. Yuppiechef’s customer service team sent more than half a million handwritten thank-you notes to their customers and saw 300% YOY growth. Surprises like this make us feel good and customers want to buy from brands that make them feel good!

3.   Create a loyalty program to increase CLV

Keep your customers coming back for more with rewards like discounts, free gifts and exclusive access. Loyalty programs can increase your revenue per customer and increase your customer referrals.

Here’s what you need to know about loyalty programs:

• You can offer many different rewards. Incentives can range from free shipping, discounts, prize draws, charitable donations, early access to new products and exclusive events. 1 in 2 customers report wanting early access to sales.
• You should personalize your loyalty program. Why not use self-reported data like date-of-birth to send gifts on customers’ birthdays, and use their purchase history to make it relevant? 9 out of 10 customers are happy to give more data if it results in a more personalized experience – that’s information you can use to improve your business.
• You don’t have to be big to have one. More than 50% of customers will join a brand’s loyalty program if they shop with them regularly, so even if you only have a handful of loyal customers, it’s never too early to start one.
• You don’t have to be a coding or marketing whiz. With so many free and low-cost apps available on the Shopify store, you can have your own loyalty program set up in a couple of clicks! 
  

Increase Purchase Frequency

40% of the average online store’s annual revenue comes from repeat customers. So how do you get your customers to buy from you more often?

Remarket using Email marketing 

Email providers like Klaviyo allow you to send retargeting emails to previous customers whenever they view a product, regardless of whether they’ve added it to their cart. If you sell consumables, like food, nutrition or beauty products, you can use email marketing to send a reminder to buy again just before the product is expected to run out.

Advertise to your existing customers

Remarketing through ads isn’t only for new customers. Target existing customers with suitable cross-sells that complement their most-recent purchase. For example, set up a Facebook or other social media campaign to target anyone who has recently bought a scarf with a hat and ad text like ‘the perfect partner for that scarf this Winter.’

Personalize your marketing

Personalization can work with multiple touchpoints, like social media ads, emails and even your website. Improve your website with a bespoke product carousel that changes based on customers’ preferences and browsing history. Shopify offers Personalization apps like [Limespot] this one and you can read more about ecommerce personalization here. Luxury tea-brand, Tea Forte, used personalization to show bespoke messaging and products to particular customer segments using email. Jurgen Nebelung, VP of Ecommerce and Digital credits a mindset shift from campaign-centric to customer-centric for the 25% increase in CLV they saw.

Create bespoke deals 

Deals can be used to incentivize existing customers as well as new ones. Because you’ll likely have more customer data on previous customers, you can go the extra mile and send them special offers on their birthday, or a year after they made their first purchase as a thank-you for shopping with your business.

Survey your customers regularly 

Surveys should be used to identify ways to improve your customer experience. Using their responses will help you to improve your online store and research has shown that the act of surveying customers can actually increase sales by generating awareness of a business and its products. Surveys are also key to understanding and improving your Customer Satisfaction Score.

How The Cloud Alchemist increased Purchase Frequency

‍The popular vaping store used website notifications to show relevant reminders to customers who were part of their loyalty program. The notifications increased the amount of customers engaging with the program and led to more purchases in a shorter time frame. Here’s what Founder Trevor Taylor had to say:

‘There were a handful of customers that religiously used their points as they accrued them (mostly at the $10-20 reward mark), but this year we also turned on the email feature to remind customers that they had points to spend 14 days after earning enough to redeem...since setting it up, we’ve had a marked uptick in returning customers using redeemed rewards and having those orders come through at a more regular and even pace (vs a tendency to have “hot” days where stacks of orders come in, generally on Fridays/paydays).’

Grow your brand using Customer Lifetime Value

So, to remind ourselves, the Customer Lifetime Value calculation looks like this:

Customer Lifetime Value = Customer Value x Average Customer Lifespan.

(But If you want a short-cut, try out Segments’ 14 day free trial and we’ll do it for you!)

Once you’ve found your CLV, you can increase it by targeting Average Order Value, Customer Retention and Purchase Frequency. By working on all three, you’ll likely see massive returns! 

Thanks for reading!

We hope you enjoyed reading this post and have some long term takeaways to start actioning internally. As always check out the Segments app for easy to use actionable insights to grow your store revenue and don’t forget to follow us on LinkedIn for more #ecommerce tips and tricks!

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