TLDR;
KEY TAKEAWAYS
- Customer Lifetime Value is a strategy that involves the constant measuring and reevaluation of acquisition metrics over the life of a customer.
- A customer lifetime value approach can help you find which products to offer to a customer, automate communication with them, and determine whether your business needs to change in order to retain more customers.
- Simple steps, like starting the CLV process on the first sale, using creative messaging, and identifying issues before they’re a problem, can go a long way toward creating loyal customers.
In today’s competitive ecommerce landscape, you’re likely laser focused on customer acquisition costs. It’s daunting because you have a lot of options from running ads to paying influencers.
You win if you can acquire customers profitably, right?
We are going to explore a way of looking at customer acquisition through Customer Lifetime Value. With an eye toward customer retention strategy, the acquisition metrics look different over the life of a customer. Instead of focusing on the today of acquiring a customer, we look over the potential lifetime of that customer.
We believe if you focus on Customer Lifetime Value you can turn a profit on your customers even if you lose money on the first purchase. If you employ the methods I describe, I am confident your ecommerce business will grow.
What You Need to Start with Customer Lifetime Value
Products and Customer Relationships
Margins are notoriously fickle in ecommerce so what can you do? If you have discretionary products, commodity products or high-competition products, you need to differentiate and sell more.
Through the Customer Lifetime Value focus, you can maximize the value you get out of your existing customers while developing a relationship with new customers. Take a wide view of your customers and your current product mix.
A Customer Lifetime Value approach can help you answer these questions:
- Are you able to find complementary non-discretionary items to offer alongside your discretionary products?
- Have you automated the communication to your customers after the sale to cross sell and through the sales process to highlight your brand value to make clients “stick”?
- What would change about your business if you worked on improving your customer retention?
- Do you have a highly organized CRM that allows you to determine opportunities to sell to your clients?
- Do you have a branded website or are you reliant on the Amazon model which leaves you beholden to the marketplace’s whims and changes in policies?
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Products and Customer Relationships
Margins are notoriously fickle in ecommerce so what can you do? If you have discretionary products, commodity products or high-competition products, you need to differentiate and sell more.
Through the Customer Lifetime Value focus, you can maximize the value you get out of your existing customers while developing a relationship with new customers. Take a wide view of your customers and your current product mix.
A Customer Lifetime Value approach can help you answer these questions:
- Are you able to find complementary non-discretionary items to offer alongside your discretionary products?
- Have you automated the communication to your customers after the sale to cross sell and through the sales process to highlight your brand value to make clients “stick”?
- What would change about your business if you worked on improving your customer retention?
- Do you have a highly organized CRM that allows you to determine opportunities to sell to your clients?
- Do you have a branded website or are you reliant on the Amazon model which leaves you beholden to the marketplace’s whims and changes in policies?
Lifetime Value Relies on 1st Party Data
1st Party Data is data that you own and that you collected with permission from your prospect or client. You don’t have to be Proctor and Gamble or Kimberly-Clark to aggregate 1st party data. This data is gold when you know what to do with it.
1st Party Data starts with an email address and builds a behavioral profile of a client that can lead to predictions about future behavior and upsell opportunities. When employed, you can serve your customers better and build a brand that endures, often with less work.
When you collect and own the data about your clients you can put it to use to inform decisions about products and services. With the right tools and ecommerce agency you can execute plans off that data. If you are reliant on marketplaces then you have very little 1st party data. To achieve the dream of Customer Lifetime Value, you need 1st Party Data.
The Challenges of Customer Lifetime Value
You wouldn’t go on a trip without a map and you shouldn’t run your business without a clear measure of where you are and where you’re going. If a measurement takes too long to calculate then it’s not useful.
Like many online store owners you are likely looking at metrics like ACOS, ROAS and customer acquisition costs (CAC). While it’s worthwhile to do so, you cannot focus on acquiring customers and the costs associated with them alone. Bottom line: if you’re looking at the CAC for the first purchase as your main measure, that’s a problem.
For example, if you’re CAC focused this scenario might describe you: Do you have a cart abandonment email that immediately sends a discount if they don’t buy? If so, you’re probably training your customer to look for discounts. After they get that first abandonment email with a discount they know they can go to that for future discounts, too.
The problem is that you’re focused on the first sale and what it will take to win and you’re forgetting about the bigger picture. You do need that future sale to begin the lifetime value process, but you have to do it correctly. It starts with the end in mind.
The answer is the Customer Lifetime Value (CLV). When you know the full value of a customer and the frequency of their purchases, you communicate differently with them so they’ll tell their friends, with no costs to acquire them. Let’s learn how to calculate this magical metric.
Moving from CAC and ROAS to Calculating CLV
Many online stores focus on ROAS as a measure of acquisition costs. This metric is calculated revenue over a given period of time divided by the advertising costs it took to generate that revenue x 100 (it’s expressed as a percent). As a rule of thumb – on average a 300% ACOS is considered really good. Although I don’t necessarily like this metric, it’s easy to calculate and measure against.
Customer lifetime value is not as easy to calculate.
Customer Lifetime Value Calculation is Complex
Chances are you are running your ecommerce store using one of the popular platforms today: Shopify, Big Commerce, or WooCommerce. They provide an easy way to list products, brand your store, and dial in your payments and pricing. Recently they have been doing a better job of providing analytics for your store, but none of them offer a CLV metric.
The Customer Lifetime Value formula is straightforward: average purchase value for a customer multiplied by their lifespan (or purchases). Sounds easy, right? However, to calculate an accurate CLV it takes 10-12 data points that need to be calculated in real time. Determining lifespan is especially tricky (especially with a new store) and it’s paramount that this number be accurate or the CLV is a useless metric.
Using a Tool to Calculate Customer Lifetime Value
Is there a magical tool to help you measure and take action on CLV? Yes, of course there is. It’s Klaviyo. You might think of Klaviyo as an email delivery program, but it’s much more than that. In fact, Klaviyo is a better customer management tool than any of the ecommerce platforms I mentioned.
Klaviyo uses AI to determine buying cycles for your customers, keep track of their previous purchases and store the products they purchase. With this data you can automate actions based on your customer’s behaviors and encourage more sales on your site.
Klaviyo is just a tool. While you can see the Predicted CLV and the actual, Historical CLV, taking action on this information is paramount to unlock the potential of this tool. Beyond creating Predicted CLV segments, your focus needs to be on how to get more people into your prediction model. That means nurturing more sales.
From the cart abandonment example above, a CLV focused company might do the following:
Let’s say, you’re selling baby clothes. Although margins are thin and competition is high, based on your lifetime value data, the customer has the potential to spend hundreds of dollars with you.
You might decide that only the first sale gets a reduction in price via coupon and you highlight that it’s a one time code. Additionally, you make the code look unique so your customer doesn’t think that everyone gets it. You might even put a time limit on it’s use.
For this first sale, because you know the likelihood that the customer repeats their purchase, you might go so far as to sell the first product at a small loss.
Knowing their Predicted CLV gives you the confidence to encourage the purchase today in hopes of making a customer for the next few months of their child’s development.
8 Steps You Can Take to Implement CLV in Your Company
First Things First: Start with the End
The first step is to put a tool in place like Klaviyo to begin to aggregate the 1st Party Data you need to measure CLV.
Next, focus on customer retention and the quality of communication to your existing customers. Instead of fishing for more prospects to begin with, ensure you grow existing customer relationships with continual communication that is personalized and timely. Create customer loyalty from the beginning by employing a CLV program.
Customers often choose to stay in contact with a brand in a channel different than the one they originally converted with. If you used Google Ads then a retargeting Facebook ad as a last touch to conversion is not an efficient way to keep in touch. Instead look to email, social media, or SMS to keep the client engaged and your brand front of mind when it comes time to repurchase. Klaviyo aggregates data from these sources so you have one location where this data resides.
It is going to take time to refine and hone the retention part of your business. Don’t expect it to be perfect from the beginning. Multivariate testing is needed as well as patience. The important part is that you focus here first so that you’re ready to acquire new customers into an improved lifetime-value focused experience.
Steps to Implement Customer Lifetime Value For Your Ecommerce Business
Here are some actionable steps you can take today to increase CLV for your ecommerce business. The next section focuses on our preferred tool for CLV, Klaviyo, and how you can use it to win more sales.
- Start small. Small wins will become big wins. The point is to start.
- What’s a cross sell/up sell for one product?
- Start the CLV process during the first sale.
- Use add-on plug-ins in your ecommerce platform and make sure they’re displaying the correct products.
- Display add-ons on the product page as well as during the checkout process.
- Layer on multiple post-sales tools. Try many tools and define a timeframe to evaluate their effectiveness.
- Use email post-sale to cross sell and upsell.
- Remarket to people who recently purchased with opportunities to buy.
- SMS is great for order updates and they’re an awesome way to continue the conversation.
- Time messaging when the next sale should happen. If you’re employing predictive CLV (using tools like Klaviyo) you are able to time this.
- Send messages the day of or a few days before the next expected sale.
- Identify issues before they’re a problem.
- Create processes that work with your customer management software.
- Customers that give you low NPS scores should be addressed in a systematic way to identify potential global issues.
- Make your messaging and creative so useful that it’s helpful to the client.
- Marketing that fades into the background.
- Offer products they didn’t know they needed.
- Get SMS consent up front.
- Cohesive strategy.
- What you do and your messaging need to work together and be on brand.
Email Tips for Customer Lifetime Value
- Focus on deliverability of your emails. Go small in audience size to have a bigger impact. Sending less is fine.
- Images are important, but do not overly use text on images or splice up large images.
- You should always send email from your domain unless you have been penalized. When possible use your domain. There is a setup involved to make this happen, but it’s worth the effort. Customers expect emails from your domain, not a long string of characters that comes from your email client.
- Have you heard the saying, “people vote with their feet”? If people are unsubscribing and marking as spam, they are deciding your content isn’t for them. Figure out why and address quickly.
Quick Email CLV Wins
- Establish all the main flows – welcome, abandoned cart, browse abandonment, sunset flow and a upsell/cross sell flow
- Create a customized abandoned cart flow
- Do different one-off offers
- Have they purchased before
- Quantity of products in cart
- Have you given them a discount they used before?
- Split the flows
- Personalize
- People love seeing their names in emails. They also love custom messaging meant just for them.
Healthy Metrics for an Email List
This comes with a big caveat as every industry and list size is different. You can have what looks to be an engaged list of your competitors or non-customers, when in reality, they aren’t.
- 20%+ Open rates (if you have heavy Apple Mail users, this should be over 35%)
- 2.5%+ Click rates
- <.4% - .8% Bounce rate
- <.05% Spam rate
Final Words on Customer Lifetime Value
I hope you see the value in looking at CLV and the advantages of having a holistic long term view of your business. With the right tools it makes a lot of sense and ultimately drives a better experience for your customer.
But there’s another view we have on CLV.
CLV does not work for every store and every product. For one, it’s not always feasible to lose money on the first sale with the hope of making another sale. If your products are sold once and there is no opportunity for a future sale, then CLV doesn’t work.
My hope is that you look at this to transform your ecommerce business for increased profit. If you’re selling face shaving devices – how can you sell more razors later on? If you’re selling laptops how do you add service plans, laptop bags, and accessories on the sale?
Like other metrics, it’s important to look at CLV as another tool at your disposal.
Would you like to implement a Customer Lifetime Value program for your ecommerce company?
The team at Win at Ecommerce would love the opportunity to talk with you. We can give you a free evaluation of your technology and help your business win.
Damon Didier
Data-driven performance digital marketer with 20 years’ experience expanding and scaling B2B and B2C businesses successfully. Develops and supports insightful customer-centric sales and marketing plans and processes with application of complementary technology.
