They say a stable and returning customer helps businesses stay alive with that frequent profit that comes from their purchases. Repeat customers are the life of the party when it comes to having stable revenue for an e-commerce business.
This category of customers has a higher purchasing power and average order value. That is why customer lifetime value become important after acquiring customers. First, you need to gain the cost spent in acquiring that customer from the profits of the purchases they make.
Second, they become that part of your customer base that keeps your business alive. So it is not enough to seek new customers every now and then. Sometimes, concentrate your marketing and sales strategy to help you retain existing customers or make new customers stay longer shopping from your brand.
And one of the ingredients to make that happen is to build a trust-based relationship with your customers. This will help you groom a bunch of customers who are loyal to your brand and trust what you do.
there are several ways to gain a customer’s trust to improve their lifetime value. some of which include offering quality products and high-value customer service.
Let’s see how improving customer lifetime value boosts your e-commerce store’s growth.
What is Customer Lifetime Value?
Customer lifetime value is an e-commerce metric that shows the total value a customer brings to your e-commerce store over the entire duration of their customership. It includes the projected profits that can be generated from a customer throughout the period they buy from your store.
One key item that customer lifetime value takes into consideration is ‘repeat purchases’. Repeats customers are characterized by the other factors used in terming a customer lifetime value such as average order value, frequency, and length of the customer’s relationship with the business.
To calculate a customer’s lifetime value, you need to know the lifespan of the customer (how long the customer has been buying from your store), the average order value, and purchase frequency.
CLV = Average order value x Purchase frequency x Customer lifespan.
For example, if the average order value is $50, customers make an average of 3 purchases per year, and the average customer lifespan is 5 years, the CLV would be $750 ($50 x 3 x 5 = $750).
Why Is Customer Lifetime Value Important For Your Store’s Growth?
1. An Insight Into How To Reach Target Customers
When discussing marketing strategies for e-commerce stores, it is a different stroke for different folk. What I mean is what works for store A might necessarily not work for store B even when both stores are owned by the same person.
There are different factors determining what marketing strategy will work for a store. Your product niche, target customers, and customer behavior are factors that determine which marketing or sales strategy will make you acquire a customer and get sales.
Once you have that figured out, it becomes easy to acquire customers and also reduces customer acquisition costs a great deal. Knowing the customer lifetime value for a store helps you know what marketing strategy works.
Let’s say, you had a discount marketing strategy to drive customers to your store and that kept Mr Jack buying from your store at least 5 times in a year for 3 years. If this is also reflected in other customers, it shows that the marketing strategy can help you acquire more customers and increase their lifetime value.
The CLV of an existing customer can help you decide the marketing strategy that can help you reach target customers.
2. A Metric For Measuring Marketing Strategy Effectiveness.
Customer retention and a high customer lifetime value is the goal of every marketing outing. Acquiring new customers who are then converted into lifelong repeat customers is what gives any business a stable source of revenue. They keep the revenue graph line up.
Therefore, calculating your CLV helps you know how effective your marketing strategies are. If a customer’s lifetime value pays well for the cost of acquiring the customer, it shows that the strategy used in acquiring that customer is effective.
This way you know if you should continue to use that strategy to reach more customers or change your marketing channel. An advantage to this is that you don’t have to waste resources by trying strategies that don’t work.
3. Improve Customer Retention Rate
A high customer lifetime value shows that your e-commerce store is profitable and stable in terms of revenue. Repeat customers are known to make a good customer lifetime value.
Repeat customers maintain a purchase frequency and a high average order value which gives them a good CLV and also become brand advocates that drive more customers to your store.
With a relatively good CLV, your customer retention rate also increases. These two metrics work hand in hand to improve each other. If your CLV is high, the customer retention rate also stays high. A good customer retention strategy also helps keep CLV in a good posture.
4. Manage Customer Acquisition Cost
When you want to cut down on the cost of acquiring new customers, the e-commerce metric you want to look into is the customer lifetime value. CLV gives you insight into customer behavior and strategies that trigger them. Their performance over time and the kind of product they are interested in can help you plan for future customer acquisition strategies.
Knowing your store’s CLV helps you determine how much you can invest in customer acquisition. If your CLV is higher than your Customer Acquisition Cost (CAC), it indicates a positive return on investment. This insight enables you to make informed decisions about marketing budgets and prioritize acquisition channels that yield higher CLV customers.
How Do You Know A Good Customer’s Lifetime Value?
To certify that a customer’s lifetime value on your store is good you need to get a value that is at least three times higher than the cost of acquiring that customer. A CLV like this shows that you have that customer performing at maximal output which is good for your revenue.
Any CLV figure that is below the customer acquisition cost shows that the customer is churning and that gives you a minus since you haven’t gained the cost spent on acquiring them. So at that point, you need to increase your marketing strategies to retarget such customers.
CLV is valuable for businesses because it helps in decision-making related to customer acquisition costs, customer retention strategies, and overall customer relationship management. Knowing the customer lifetime value for your Shopify store can help you focus on acquiring high-value customers, cut down on customer acquisition costs, engage in cost-effective marketing efforts, and improve customer retention strategies to maximize profitability and long-term growth.