What is CLTV?
If you’re running an ecommerce business, chances are that you’re already calculating a lot of metrics. CAC, CPC, ROAS, CR, and all the other 2, 3, or 4 lettered acronyms. But this doesn’t tell you much about the health of your business. Neither does it allow you to predict the status of your business 3 years from now (just saying).
This is where CLTV comes to play. Customer Lifetime Value (aka CLTV) is a metric that can tell you who your best customers are and why you should put an extra effort into retaining them. They’re the people who can take your business from 0 to 100 or vice versa.
How to calculate CLTV for your ecommerce store?
CLTV is defined as the revenue value you earn from a customer as long as they are your customer.
Here’s a simple formula to calculate the customer lifetime value for your store:
CLTV = Average Order Value x Purchase Frequency x Estimated Customer Lifespan
For example, if your AOV (aka Average Order Value) is $25 and a customer purchases your product 6 times a year for 3 years before they churn, then your CLTV would be, $450.
Why should ecommerce merchants take CLTV seriously?
CLTV is what you call a “make or break” metric. It’s that one pesky thing you can’t get rid of no matter what you do. But it comes bearing fruits. If you calculate LTV properly, it can tell you untold stories about your business.
Here are some of them:
- You can understand which products are likely to perform better in the market by calculating CLTV. It will tell you which products are being bought over and over again.
- According to a report by Marketing Metrics, the possibility of selling to a new prospect is 5-20%, but the probability of selling to an existing customer is 60-70%. By focusing on returning customers — their lifetime value — you are focusing on a strategy that gives your business higher profit margins.
- By knowing your top customers’ buying habits, you can inform your marketing strategy and focus on promoting those products that have a higher chance of fetching high-LTV customers.
How to increase your store’s LTV?
By now, you’re probably convinced that you need to focus on CLTV if want to grow your business consistently. So, without further ado, let’s look at some of the top strategies used by DTC experts to increase CLTV seamlessly.
1. Increase your AOV with Upselling, Cross-selling & Bundling
AOV is directly proportional to CTLV. So, increase your AOV, you increase your CLTV in no time. To increase your AOV, you need to increase your average order size. To do that, you can persuade the customer to buy a more premium version of the product they’re purchasing or ask them to purchase relevant add-ons along with it. This is called upselling.
Same way, you can suggest the customer get some complementary or related items to the item they’re already purchasing. Like if someone’s buying a laptop, a laptop bag would be a good related item to suggest.
Now, if your store sells very low ticket items (<$10), it’s not worth it to sell them individually. Instead, bundle them. For example, if you sell socks which are $6 a pair, then you could bundle them up and sell 5 pairs of socks at $29; that’s a $1 discount but your order value is higher than $6.
2. Retarget First-time & Repeat Customers
Retargeting isn’t reserved for those who abandon their carts. It comes in handy to increase your LTV as well. If it’s a first-time customer, you could retarget them with similar products to the one they already purchased. The same goes for a repeat customer. If they’ve purchased a t-shirt, you could probably remarket them with a sweatshirt or a pair of jeans that would go well with the t-shirt.
3. Create a Subscription Program
If you see the CLTV formula above, it’s a multiplication of 3 variables. Creating a subscription program for your products enables you to amplify the middle variable, i.e. Purchase Frequency. If you’re selling a consumable product, you might want to think about a subscription offer where you deliver them the same product after a set period of time.
For example, if you sell premium coffee in your online store, chances are that your customers would need to replenish their stock every month (depending on the quantity they bought). You could nudge them into purchasing a subscription for a discounted fee. That would increase the purchase frequency every year and in turn increase the CLTV.
Well, that’s about it for CTLV. But before you go and launch campaigns to increase your LTV, know this: you can’t increase your LTV without awesome customer service. If your overall customer experience is not up to the mark, no amount of campaigns and strategies would take you to the next level.
To do that, you should consider using a holistic ecommerce customer service tool like DelightChat. Sign-up today!