Customer Lifetime Value (CLV) is an estimate of the total revenue that your average customer will generate during their time as your customer. In essence, it is a measure of how loyal your customers are. CLV is a pretty simple concept, but a very powerful tool. When you measure CLV, you gain important insights into your customers and your business. These insights will allow you to make informed decisions and improve your profitability and expand your business.
What exactly is CLV?
CLV is the amount of money that your customer will spend on your goods or services over the entire time period that they remain your customer. It is a measure of how much value they will bring to you.
🕵️ Let’s use the example of an e-commerce store that sells 100 tennis balls per year at $1 each for ten years to a customer with an initial outlay of $5 to get the first sale. The profit would be $100 per year over ten years, reaching $1000 minus the money spent to acquire the customer($5), and an actual net CLV of $995.
How does it work?
Not all customers bring the same value to your business. Let us imagine two customers, Adam and Ben. Adam is loyal to your brand (let’s say you are an online retailer of coffee beans). When Adam needs coffee beans, he comes straight to you. He orders regularly and purchases higher-end coffee beans. Importantly, Adam stays loyal to your business, purchasing coffee beans from you for a long period of time. Adam is a customer with a high CLV.
In contrast, you also have customers like Ben. Ben is always on the lookout for a deal. When Ben needs coffee beans, he scours the internet for the cheapest option, so will only order from you if you’re offering the best deal. Ben buys the cheapest coffee beans and orders less frequently than Adam. Ben is a customer with a low CLV – he isn’t bringing much value to your company.
When you look at your average CLV, it is made up of customers like Adam, and customers like Ben. A high average CLV means that you have loyal customers – they order from you frequently, spend a lot per order, and continue to order from you for a long time. Needless to say, this is great for your bottom line. The beauty of CLV is that it can be considered the most complete metric. It combines many factors and indicates the overall health of your business.
Looking at individual KPIs can be misleading – a customer making frequent purchases might look like a valuable customer at first sight, but if that customer only purchases low-value products, you could just be burning cash on someone who is wasting your resources without adding value to your bottom line.
Why is CLV important for your Shopify Store?
If you aren’t measuring Shopify customer lifetime value, you will miss out on a useful tool 💰. When you know your CLV, you can compare it to industry averages to see how your business measures up. Of course, different industries will have different CLVs. Generally speaking, when your CLV is low, you know you have a problem somewhere. It could be that:
- Customers are dissatisfied with the product
- Customers are dissatisfied with the user experience
- You are not spending enough on keeping your customers with you
You can’t improve these things if you don’t know your CLV. The first thing you need to know to measure your Shopify customer lifetime value is purchase frequency.
Purchase frequency is how often a customer purchases over a specific unit of time. It is a measure of activity and retention over certain periods. Purchase frequency metrics can be combined with time-between-purchase and repeat purchase rates to obtain a comprehensive view of your operational performance.
For existing customers with a consistent purchasing pattern, time-between-purchase can help us to calculate the purchase frequency without waiting for a full period of time to elapse. By tracking our repeat purchase rate, we can examine our early life churn and take action from the onset.
Combined with lifetime, purchase frequency, average order value, and profit margin, you get your CLV.
The reason some businesses don’t fully utilize the potential of CLV is that it is dependent on many factors as we saw, so it can be tricky to calculate, manage, and derive decisions from. Here is where RetentionX comes into play.
How can RetentionX help?
A Shopify App that calculates CLV automatically
RetentionX can save you all the time and effort of figuring out the technicalities. RetentionX calculates the CLV right away after your integration with Shopify or other platforms. It not only calculates CLV but also lets you analyze your CLV with other KPIs such as churn rate, repeat purchase order, and different cohorts. This helps you take a deep dive into the factors which might be driving up or dragging down your CLV. In particular, it’s really important to consider Customer Acquisition Cost (CAC), together with CLV. As the name implies, CAC is the amount it will cost you to attract a new customer. With RetentionX you can integrate your CAC directly from the marketing platforms and analyze CLV with CAC.
Advertising costs likely make up a pretty big chunk of your business. Naturally, you want to make sure you’re getting the most bang for your buck. You can evaluate your Return On Investment (ROI) in RetentionX by considering your CLV relative to your CAC. Generally speaking, you want your Shopify customer lifetime value to be approximately three times your CAC. If not, you are spending too much on getting new customers, relative to how much revenue they will actually bring you. This will make your profit margins small, harming your bottom line.
“Think about the customers you want to serve up front and focus on acquiring the right customers. The goal is to bring in and keep customers who you can provide value to and who are valuable to you.”
JILL AVERY, HARVARD BUSINESS SCHOOL
Furthermore, a low CLV means that you will constantly be fighting for new customers, as your old ones just aren’t loyal enough to keep bringing in new revenue. This makes you overly dependent on new customers for product turnover, causing you to be very vulnerable to fluctuations in the economy. RetentionX customer reports are really handy in seeing how your customer base is performing, in terms of new vs existing customers.
In the case that your ROI is low, you need to make changes to how you allocate resources. Perhaps you need to spend less on attracting new customers and focus on retaining existing ones, or you need to be more selective in which customers you really want to be attracting. Research shows that customers that keep coming back are worth more to your business than new ones. Furthermore, it is estimated that acquiring a new customer costs 5-25 times more than retaining an existing one. Special offers and promotions, loyalty programs and quality customer service can keep your existing customers coming back for more.
Acquire better customers.
You can either create segments using our suggestions or build your own segments from scratch.
One mistake newcomers often make is thinking that the more customers they acquire the better. Remember customers Adam and Ben from the previous section? Customers that are generating value are worth more to your business than customers that are just looking for a good deal. In fact, the latter may in fact be costing you. Therefore, your business is, put frankly, better off without them.
You want your customer base to be made up of customers like Adam to boost your CLV and boost your profits. This is where customer segmentation comes into play. Customer segmentation is dividing your customers into groups based on certain characteristics, allowing you to develop specialized strategies for each, in a way that maximizes profit. You can divide and organize customers into groups based on characteristics like gender, age, demographic, browsing behavior, or spending habits. Read our post on customer segmentation to find out RetentionX’s functionalities for customer segmentation. https://blog.retentionx.com/shopify-customer-segmentation/
With regard to customer segmentation by CLV, you can either predict which customers will be high-value customers or market to them accordingly. This way you can only attract the customers that will benefit you. Alternatively, you can look at your existing customers. Which customers are like Adam – loyal to you and raising your value? Which customers are like Ben – only ordering from you when they spot a bargain and bringing you down? Once you’ve established this you can strategize accordingly – focus your retention efforts on the Adams to keep them loyal to you for longer. Don’t waste your time and money on customers like Ben who are less likely to make a repeat purchase anyway. Using RetentionX’s hundreds of additional KPIs, you can segment your customers on the go and target them automatically with integration with marketing partners.
You may ask yourself:
- How to find LTV in Shopify?
- How to get a lifetime value report on Shopify?
- Shopify where can I find lifetime customer value?
- How to find customer lifetime value Shopify?
- How do I get LTV from Shopify?
The answer is simple as it can be 😜
RetentionX will compute LTV and numerous other relevant KPIs with our own data. Completely automatically.
RX Academy – 10 weeks growth program.
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RetentionX is the tool you need!
We hope that this post has given you some insight into the exciting and rapidly growing field of customer segmentation, and how you can implement it into your business. To experience what RetentionX customer segmentation can do for your business, register for a free trial.
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