Customer Lifetime Value is one of the most important metrics any Shopify store should calculate. It helps them track and evaluate how profitable customers really are, as well as find the perfect balance between acquisition and retention.
You can call it CLV, LTV, or CLTV. No matter the initialism, knowing this metric will help you focus on the most important marketing efforts, optimize your strategies, and adjust the budgets for your acquisition and retention campaigns.
Let’s see what customer lifetime value is, how you can calculate this metric and the tactics and metrics that can help you improve it.
What is Customer Lifetime Value?
Customer Lifetime Value (CLV) is defined as the net profit a customer is expected to bring during the entire customer relationship. It helps you evaluate how healthy your eCommerce business is and how to optimize your acquisition and retention strategies to increase the number of loyal, profitable customers.
Your loyal customers bring significant sustainable revenue to your company, but we know brand trust is built over time. Once you start looking at data to calculate and monitor CLV, you’ll notice that some customers aren’t profitable from their first purchase. But, by implementing a good retention and loyalty program, their chances of becoming your next loyal customers are high.
Let’s take, for example, a loyal customer who is passionate about beauty care and has been buying from the same online shop for five years. Every two months, this customer spends, on average, $150 to purchase their favorite products and try new ones. So, the CLV of this loyal customer is $4500 ($900 every year).
Why is Customer Lifetime Value an Important Metric?
Customer Lifetime value is your north-star metric, helping you build customer-centric strategies around the wants and needs of your brand’s most valuable customers.
While CLV is one of the most important KPIs, you shouldn’t track it in isolation. If you want to find how much value your customer brings compared to how much you spend acquiring a new customer, you have to calculate the customer lifetime value to customer acquisition costs (CAC) ratio.
Calculating CLV:CAC ratio will help you adjust marketing campaigns to boost customer profitability. By dividing CLV by CAC, you find if the company is spending properly on acquisition campaigns. If your CLV to CAC ratio is below 2:1, you’re spending too much on acquiring customers compared to the value they bring.
Shopify merchants use predictive CLV for improved business forecasting. Many companies automatically calculate predictive CLV with the help of a software solution that uses predictive models to analyze historical data.
Mixing the insights gained through CLV analysis and customer satisfaction metrics allows you to forecast future customer behavior. Knowing how satisfied your most loyal customers are helps you understand how their experiences might impact future sales and relationships.
Combining CLV analysis with segmentation models will help you identify your store’s most valuable customer segments. You gain better marketing focus and make better decisions for both acquisition and retention efforts.
You can build lookalike audiences based on your high LTV customers and use them in ad campaigns, such as social media ads, to attract more new valuable customers like your existing ones. You can treat your best customers better by optimizing the retention and loyalty programs around what works according to your customer segmentation and CLV analysis.
CLV analysis and RFM segmentation
Companies combine the insights gathered through CLV and RFM analysis to identify their best customers, predict which customers are likely to buy again and become loyalists, and determine how much value they will bring to the business during their lifespan.
RFM is one of the most popular customer segmentation models Shopify stores use to segment their customer base using behavioral data. RFM analysis helps you evaluate and segment customers based on their recency, frequency, and monetary value.
Let’s explore each variables:
Recency (R) reflects how recently a customer has purchased from your store. Customers with high recency scores are more likely to keep ordering, so you want to keep them hot and engaged. The more days pass without placing a new order, the more likely you will see churn increase.
Frequency (F) indicates how often a customer makes a purchase. The frequency is influenced by several factors, including the products you sell, the prices you apply, or the replenishment or replacement needs by product type. Calculate the purchase cycle to find what’s a good frequency rate for your business model.
Monetary value (M) shows how much a customer usually spends. This indicator helps you identify high spenders with a better ROI. Be careful when analyzing monetary value because you can also have loyalists with low purchasing power. You don’t want to neglect them either as, over time, they might end up spending more.
Improving the RFM values helps you increase customer lifetime value, so you want to include them in your KPI. In the following section, we look at other KPIs that influence CLV.
How to Calculate Customer Lifetime Value
It’s time to look beyond the metrics you find in Google Analytics and go to your Shopify database to find the numbers that help you calculate Shopify LTV.
Stores that calculate CLV on a regular basis are more agile in identifying winning marketing campaigns that keep customers loyal and happy while generating sustainable business growth.
In this section, we look at the key business metrics that help with customer lifetime value calculation and the formulas you need to calculate each key performance indicator.
Average Order Value
The formula for calculating the average order value is total sales divided by total orders. To find your values in Shopify, go to Analytics > Dashboards. Be careful to select the correct time period. Find the values in the Total Sales and Total Orders widgets.
Average Order Value = Total Sales ÷ Total Orders
Average Purchase Frequency
To calculate the average purchase frequency or the average number of transactions per customer per period selected, you have to divide the total orders by the total number of unique customers. In the Customer portal, you can find the number of unique customers who have purchased during the selected timeframe.
Average Purchase Frequency = Total Orders ÷ Total Customers
Average Customer Value
The formula for the average customer value is the average order value multiplied by the average purchase frequency. If you don’t know the values for AOV and average purchase frequency, follow the above steps for these two metrics.
Average Customer Value = Average Order Value x Average Purchase Frequency
Average Customer Lifespan
The average customer lifespan is reported in the number of days. The formula is the sum of customer lifespan divided by the total number of customers for the analyzed time frame. To find out the sum for the customer lifespan, you have to subtract the last order day from the first order day, and save the result in the number of days. Finding the total number of customers is easy, as we showed in the previous sections.
Average Customer Lifespan = Sum of Customer Lifespan ÷ Total Number of Customers
Customer Lifetime Value
The formula for calculating Customer Lifetime value is the average customer value multiplied by the average customer lifespan.
Customer Lifetime Value = Average Customer Value x Average Customer Lifespan
It’s true that manually calculating CLV takes a lot of time, but you can use a customer lifetime value calculator or pick one of the Shopify apps that automatically calculate Shopify customer lifetime value. This way, you save a lot of resources to focus on transforming the gathered insights into effective strategies to improve customer lifetime value.
How to Improve Shopify Customer Lifetime Value
Now that you understand the importance of CLV and know how to calculate it, it’s time to focus on some of the best practices that help you improve this key metric and the overall customer experience.
Building a loyalty program is one of the best ways to keep your most valuable customer close and happy in the long haul. These programs include a mix of rewards, special discounts and VIP benefits, tiers, gamification, surprises, and free shipping.
The personalized experiences you can create through loyalty programs help you build an emotional bond with your customers, making them less likely to leave despite your competitor’s aggressive campaigns.
Use cohort analysis and product performance report to identify those tactics that transform a one-time buyer into a repeat customer. Build your loyalty programs based on the needs and motivations of your most valuable customers to encourage repeat purchases and boost the customer’s lifetime value.
Upselling is yet another good idea that can help you improve Shopify Customer Lifetime value. It helps you increase the average order value, customer loyalty, and CLV by encouraging them to purchase a premium or upgraded version of an item. It might be an upgrade to a product they’ve already purchased, a better version of a product they have been browsing, or an item sitting in their cart for a while.
When you use upselling as a marketing tactic, your goal is to help customers understand the added value of the higher-priced products. Personalized recommendations and product comparisons emphasize the new benefits brought by the more expensive alternative.
You place upselling messages in the product or category page while they’re shopping online, on the shopping cart or checkout, and even post-purchase, in the follow-up email sequences.
Easy returns positively impact post-purchase customer experience and make new and loyal customers more likely to purchase from your store again. Returning orders isn’t pleasant for anybody, but you can significantly simplify and improve the experience by automating the process.
There are dedicated apps, like Rich Returns, that help you bring to life a hassle-free experience for your customers and offer convenient refund alternatives, such as exchanges, store credit, or gift cards.
Return apps allow you to customize a self-service portal that seamlessly integrates with your website and other tools. Thanks to return apps, your customers can return items without help from your customer service team. You can proactively communicate with customers via emails and other notifications to deliver better customer experiences.
Next steps to improving CLV
In this article, we covered essential details about customer lifetime value, the formula, and metrics that help you calculate it, why it’s crucial to track it regularly, as well as some of the best practices for improving Shopify customer lifetime value.
So, which will be the first tactic you apply to improve CLV? You could start by enabling easy returns. You have a lot on your plate, so automating returns, refunds, and exchanges will give you more time to focus on more important tasks and offer a more user-friendly process.
Learn more about Rich Returns on Shopify App Store and start your free trial today.