If you’ve been in the ecommerce business long enough, you will know the pain of one-time customers and how difficult it is to retain customers in the long run. If there is one heartbeat of a business, it’s undoubtedly the customer. For any business, the customer and their journey are vital for the survival of the business. Hence we see more and more companies drifting their focus on CLTV (Customer Lifetime Value). Over the last couple of years, marketers have created their respective definitions of CLTV. Still, it all boils down to the same explanation: It is the net profit contribution of a customer over time.
As an owner of any business, you must have your CLTV or LTV higher than the cost of customer acquisition. Some statistics suggest that the top 1% of ecommerce customers are worth 18 times more than an average customer. It’s a common rule of thumb that 80% of your future transactions will come from just 20% of your customers, proving again how important it is to focus on the customer lifetime value. With the pandemic, there has been a massive change in customers’ purchasing patterns, especially the old ones.
This blog will explain what CLTV is and how it is essential for your ecommerce business and share some proven strategies by our Upshot team to encourage customers to spend more and buy more often.
What is CLTV?
CLTV indicates the total profit that a business can expect to generate from a single customer account over the predicted lifespan. Therefore, one thing to consider here is that it’s the profit margin that the companies should focus on and not the revenue. It prevents businesses from overspending, believing that they have more funds available to acquire new customers, which might not be the case.
While measuring the CLTV, all the costs should be accounted for, including the customer acquisition costs (CAC), operating expenses, marketing expenses, and manufacturing expenses.
Because of silos and multiple units operating independently, many companies miss out on these costs and measure the CLTV only for a short window with the data they can gather, which might not give a clear picture of the customer’s real value.
How to measure Customer Lifetime Value?
Step 1. Calculate Average Purchase Value
|Average Purchase Value(per transaction) = Total Revenue / Number of transactions|
Step 2. Calculate Average Purchase Frequency
|Average Purchase Frequency (or Average number of transaction in a given Time Period)= Number of Purchases in a given period/Number of Customers|
Step 3. Calculate Average Lifespan of the Customer
|Average Lifespan of the Customer(or Retention Time Period) = sum of customers lifespans/ number of customers|
If you don’t have data for the past 5-10 years, the other way to measure it is to divide 1 by your churn rate percentage.
Step 4. Calculate Customer Value
|Customer Value = Average Sale Value per transaction x Average number of transactions in a given Time Period * Retention Time Period.|
Here, CV measures the average revenue that a single customer brings over his entire lifespan. But to get an accurate picture, we also need to incorporate Cost into account.
Step 5. Measure CLTV
|CLTV = Customer Value x Profit Margin|
Let’s understand how to calculate your CLTV with an example.
Let’s assume a hypothetical case of your ecommerce channel to understand how CLTV can be measured. Say an average customer spends $20 per purchase and purchases 2 times a year for 5 years.
The Value of this Customer will be
$20 per purchase x 2 purchases per year x 5-year lifespan = $200
Therefore this customer brings an average revenue of $200 to your e-commerce platform throughout his life span of 5 years.
After calculating the cost of goods sold and other expenses like overhead, administrative, and marketing, the profit margin of your company is 20%.
Therefore Customer Lifetime value of the customer will be $200 x 20% = $40
The average profit that this customer brings to the company is $40, which is far less than the Customer Value or the revenue of $200.
The CLTV will be useful in the following ways-
- Firstly, To project future cash flows.
- Secondly, Understanding how many customers the company should acquire to achieve the desired profits.
- Thirdly, Deciding the Marketing budget and other expenditures for the given time period.
- Lastly, Verifying the quality of customers targeted during the marketing campaign
Factors contributing to the CLTV
- Customer Satisfaction
The happier the customer is with the products and services, the more likely he is to spend more. This will increase the average purchase value of the order and increase the frequency of orders. Companies should continuously work along the lines of providing a better customer experience for high customer satisfaction.
source : Freepik
- Customer Retention
Acquiring a new customer is more expensive than retaining the existing customer. Nowadays, the business must identify and nurture the most valuable customers and convert newly acquired customers to a loyal base. Doing so will reduce the churn rates and bring in more revenue, which will have a positive impact on the CLTV.
- Optimized Marketing Spends
Companies need to optimize their marketing efforts. Measuring campaign performance and tracking the critical KPIs will allow companies to develop the right marketing strategy. Companies should continuously explore new channels and do A/B testing to identify the right engagement strategy, reducing the marketing spending, thereby increasing the profit margins and CLTV.
How do Loyalty programs improve CLTV in ecommerce
Programs targeted towards frequent shopper rewards:
An upgrade to an average membership is one of the most effective ways to increase CLTV. It will help in more frequent purchases and provides a gift or cashback with every new purchase. For Example, Google Pay gives coupons and cashback for every transaction made through the app. It gives you extra cash back for adding new avenues for payments like Gas bills, DTH, etc. Similarly, CRED also gives CRED coins for every successful credit card payment, and the coins could be used to purchase anything from the in-house store.
Picture: Some Screenshots from the CRED interface.
Flash Sale Days and Special Event Incentives:
Almost every ecommerce channel has adopted this pointer in the past, and it has turned out to be one of the most successful ways of increasing CLTV.
Brands like Flipkart have Big Billion Days, which records the highest day sales just by encouraging repeat purchases by creating a sense of exclusivity and urgency.
For example, if you offer a Rs.100 credit to anyone who will make a purchase of Rs.500 or more within the next 24 hours, or offer a 10% price reduction to anyone who upgrades to premium membership in the coming week.
Not only will these sales give immediate revenue, but research also indicates that a satisfied flash sale customer will return to spend another 385% of the first purchase.
Meaningful product bundles:
Many apps provide product recommendations automatically but at times without any basis. Hence they are often ignored and passed around.
But with the beauty of data-driven marketing – you don’t have to guess what will work and what might not.
Understand the data and check what your customers often club together before buying. These are generally the bundles they care about.
You will be surprised to see the response rates for repeat customers and will immediately increase your CLTV, as it is super easy to use your data and learn directly from your customers.
You can also check our latest blog on: How to Incentivize Loyal Customers in the Ecommerce Business
About Upshot.ai :
Upshot.ai is an omnichannel, user engagement, and gamification platform that helps digital product owners and marketers improve their product adoption and conversions. Fortune 1000 companies such as GE, UHG, Puma, Sony, ITC, Tenet healthcare are using Upshot.ai and observed a massive increase in product adoption YoY increment in revenues.
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