Why You Should Know More About "Customer Lifetime Value"
Businesses who sell products and services online—as well as their brick-and-mortar counterparts—ought to know more about the very important CLV, or “Customer Lifetime Value.”
Certum Solutions specializes in providing e-commerce services to a diverse client base. We recommend Shopify or Webgility for your POS because they both integrate with QuickBooks Online. While we are able to advise you on many details associated with your shopping cart and accounting system, knowing more about other details related to your business is also very important, especially your customers.
After all, the more you know about your customers, the more sales you might realize, right? Let’s dive into CLV and what it could mean for your business.
Why Customer Lifetime Value is Important
In short, CLV tells you what you can expect from an average customer over the course of your business relationship. It’s not intended to show one moment in a buying cycle; rather, it encompasses the entire timeframe someone is a customer.
We all want customers for life, of course, but even in the best of circumstances, this may not be possible. Let’s say you manufacture a particular type of garden hose that does not ever kink or become tangled—I’d love to have one of these myself! You know you have a loyal group of customers who, for all intents and purposes, will continue buying these hoses for life, but for the sake of the environment, begin xeriscaping their yard with drought-tolerant plants.
According to Shopify, CLV is the total net profit a company can expect to generate from a customer throughout their entire relationship. It considers the customer’s initial purchase, repeat purchases, and the average duration of their relationship with the company.
CLV helps you understand and gauge current customer loyalty. In the example above, if your sales continued to be strong, that’s a good sign you’re doing the right things in your business, but more importantly, the larger the customer lifetime value is, the less you’ll need to spend on acquiring new customers.
In addition to affecting your acquisition strategy, understanding CLV also helps improve customer retention, customer support, and the quality of your products and services.
How to Calculate CLV
Simple math is the key to calculating CLV.
According to Shopify, you’ll need to know the following:
The average purchase that a customer makes.
The average rate in which a customer makes a purchase.
How long a customer typically remains loyal to your brand.
Certum Solutions can assist you in figuring out these numbers based on your accounting system. Once you have the numbers, the CLV formula is:
Average Order Value x Purchase Frequency x Average Customer Lifespan (LTV)
And the bottom line is this: The higher the number among your customers, the more likely they are to continue buying from you.
Here’s an example. If you sell gift baskets online and an average customer purchases $500 worth of products three times a year—and remains a customer for five years—the CLV of that customer would be $3,000 ($200 x 3 purchases x 5 years).
Again, the number may be arbitrary; the more important measurement is knowing how the number actually affects your business—and no business owner I talk to ever says they have plenty of customers. As a result, there are ways to increase CLV. For example, you could give away something free.
Calculate CLV and Assess Your Sales
There are a lot of ways to increase sales to your customers and/or make them customers for life—too many to dive into for this article. But more on that another time.
Certum Solutions can help you with CLV and many other aspects of your e-commerce business. We’ve got the experience you need to run an efficient online company, regardless of what you’re selling or producing. Contact us today for a free consultation.