A thriving business relies on its repeat customers. That’s why customer lifetime value (CLV) optimization is crucial for long-term success. For your ecommerce brand to boom, you need to focus on CLV! Thankfully, a few simple tweaks to your online store can massively impact your bottom line.
You might be familiar with the concept of customer lifetime value (CLV). It’s a way to measure how valuable a customer is to your company over time. We all want customers who purchase from us often and spend their cash freely!
Having to acquire new clients every day can be expensive and is getting more costly. By focusing on customer lifetime value optimization, you can build a robust, profitable business.
If you’re not thinking about CLV or even customer lifetime value optimization, this article will help. We’ll discuss why it’s important and how to build deeper customer relationships that help you raise the average CLV.
What Metrics Influence CLV?
Calculating Customer Lifetime Value (CLV) can be tricky as it uses a combination of key metrics to create a picture of a customer’s worth over their engagement with a company.
Let’s look at some of the key metrics needed for calculating CLV.
Average Order Value (AOV)
You should understand and be using AOV in your daily life. If you’re not, this number is the average a customer spends in a single transaction. The higher the AOV, the higher the CLV.
There are a ton of tactics you can test to increase AOV, including upselling cross-selling, bundles, and offers.
Purchase Frequency (PF)
Many businesses suffer from a low purchase frequency (PF). Someone who only purchases once in their lifetime or every couple of years isn’t a desirable customer.
Ideally, we’d attract customers who buy a few times per year as this generates long-term value. You can increase PF with loyalty programs, subscription models, and monthly email marketing campaigns.
Customer Lifespan (CL)
The dream customer keeps purchasing from our store every few months for years! Customer Lifespan (CL) is helpful to know the average months/years every customer sticks around with us.
One way to improve your CLV is to extend CL, turning months into years.
You can extend the CL amount by delivering excellent customer service, bringing new products to market, and building a community.
Simple vs Predictive CLV Calculations
Basic CLV calculation
Before we cover strategies for customer lifetime value optimization, we need a way to calculate CLV. There are several ways to do this, from straightforward estimations to complex predictive models.
The easiest way to calculate CLV is: CLV = (Average Purchase Value × Purchase Frequency) × Customer Lifespan.
The inherent problem with this calculation is it’s retrospective and doesn’t predict future customer behavior or changes in market dynamics.
Predictive CLV calculations
We can use machine learning algorithms and statistical modeling to forecast future customer behavior. They use a wider data set, including demographics, past interactions, and external factors.
Predictive models can estimate the probability of future purchases, churn, and even the value of those future transactions, offering a more accurate and forward-looking view of CLV.
Running these models requires sophisticated data science expertise and robust data infrastructure. So, it’s not something a small business can do but it’s still worthwhile understanding the process.
Importance of Data Collection and Analysis
Regardless of how you calculate CLV, collecting data and analyzing it regularly is essential. Otherwise, you’re sat on a goldmine of information that could easily double your profits.
You should be collecting data across all customer touchpoints including purchases, customer service tickets, review platforms, and feedback surveys.
After collecting the data and verifying its accuracy, you must analyze it to identify patterns, trends, and correlations among the various metrics influencing CLV. Once you have a good understanding of your CLV, you can look at strategies for customer lifetime value optimization.
Strategies for Customer Lifetime Value Optimization
Now we’ve covered the basics of CLV, it’s worth looking at a few strategies for customer lifetime value optimization.
Zeroing in on the who and who
You should get clearer on who your ideal customers are and what channels they use. Doing so will help focus your efforts on what will drive business. Unless you’re a volume business, you want to be careful to attract long-term customers who have a high CLV!
Making a lasting first impression
Many visitors won’t join your mailing list, instead they’ll make a purchase. Their first experience of your brand is a receipt that has little information about you, the next step in the purchasing process, or doesn’t create customer delight.
You can use marketing automation to improve the welcome email sequence for those signing up on your website. You can also tweak your transaction emails to be unique and invite customers into a 2-way conversation.
Always be thinking about the value you add to the end customer and how you can demonstrate it (not just talk about it!).
Increase AOV
If 50% of your customers purchased an additional item every time, you could easily double your profits. I know that sounds far-fetched but the maths stacks up, as it’s usually more profitable to sell two items in a transaction than one.
You can use upselling and cross-selling when a visitor adds an item to the cart, on the cart page, and during the checkout process. If they abandon their cart, you can use your abandon cart emails to upsell or cross-sell items.
You probably have a good idea of what product bundles will be attractive to your customers. Again they can help you make more profit per order and help you with customer lifetime value optimization.
Increase purchase frequency
Encouraging customers to buy more often could include introducing new products, sending regular newsletters, and win-back campaigns (e.g. “You have purchased from us in 60 days, have a look at..“)
If you run a business where you can offer subscriptions (toilet paper/coffee/air-filters/pet food), you can use marketing automation to send reminders and replenishment prompts, all of these ideas will increase the frequency that people will buy from you.
Technologies for CLV Optimization
If you’re serious about customer lifetime value optimization, you’ll need to embrace new technologies.
I’m often surprised how many businesses aren’t using a CRM or even detailed segmentation in their marketing automation platform. Many brands invest in the latest shiny tools, only to abandon them after a few days, which is shocking!
Customer Relationship Management (CRM) systems
A lot of smaller businesses are using Shopify as their CRM, which is ok but not ideal. If you want to grow rapidly, you need a CRM to hold your customer data.
When used properly, a CRM can store all of a customer’s orders, interactions with your team, personal details such as their birthday, and communication preferences.
You can then use this data to more effectively market to different segments of your customer base, send them a birthday message, and ensure you take care of your best customers.
Marketing automation platforms
Many think marketing automation is only email, they integrate an email marketing platform such as Klaviyo or Omnisend and send a monthly email.
True marketing automation is much wider. You can send SMS, WhatsApp messages, direct mail, and of course, email. But you need a CRM system to store every customer’s preferences. From the CRM you can feed data into Klaviyo or Mailbox Power to handle the automated tasks.
Data analytics and business intelligence tools
It seems that Google Analytics (GA4) is both widely used and hated in equal measure!
GA4 is a good starting point but true customer lifetime value optimization requires deeper insights provided by dedicated data analytics and business intelligence (BI) tools.
Google offers a powerful BI tool called Looker Studio, which can pull data from GA4, Google Search Console and your ecommerce platform to give you better insights, more quickly. As you discover trends, you can adapt your marketing plans to improve your AOV and CLV.
Customer feedback platforms
Improving your CLV isn’t rocket science and it has a lot to do with customer insights. Build time each week to talk with customers, read reviews, and consider what your teams are learning from their communication with customers.
Use these insights you gather to inform how you improve your business as every tiny change can have a massive impact on your CLV. As I always say to my clients, listen to the customers, they have the solutions!
Measuring and Monitoring CLV Optimization Efforts
Before you can try some of the customer lifetime value optimization strategies in this piece, you need to decide how you’ll measure and monitor your efforts.
KPIs to track
I continually talk about KPIs as they help measure outcomes and allow you to track if your efforts are helping you move closer to your goals.
It’s best to pick 2 or 3 KPIs to track. You could measure CLV growth, Retention rates, Repeat purchase rates, and AOV. Use a 12-month benchmark figure as your starting point. Over time keep increasing the KPIs, so you get closer to reaching your goals.
A/B testing and experimentation
You can then start to use A/B testing to try different experiments that will help you improve your figures and hit your KPIs.
Continuous improvement based on data
You have all the data and access to customers you need to improve your AOV and CLV. Plan a list of 1 or 2 ideas you’ll test each month and start. Over time, you’ll improve your business by using your data and experimentation.
Overcoming Common Challenges With Improving CLV
When it comes to customer lifetime value optimization, you’ll likely face a few challenges. Some are easy to overcome, while others require an organizational shift.
Lack of a customer-centric culture
Every brand claims to be “customer-centric” and really values its relationships with customers. Sadly, very few walk the walk. It’s become commonplace to adopt restrictive customer care policies that harm the relationship.
You can become more customer-centric by actually talking with customers, acting on feedback, and putting yourself in their shoes. In a world where consumers have multiple options, showing you actual care can help improve CLV and create a positive brand sentiment.
Data silos and integration issues
On paper, calculating metrics such as the average purchase frequency should be easy. However, if you’re running an advanced tech stack, you might have data in multiple silos without having a central point of truth.
It then becomes a mammoth task to calculate even the simplest metrics. Your IT team or supplier should be able to build a dashboard that pulls data from multiple sources and gives you answers to these key questions.
Proving ROI of CLV initiatives
Even in a world where we’re surrounded by data, proving the ROI of your customer lifetime value optimization efforts can be tricky. It’s why setting and tracking KPIs is vital, and monitoring the change in NPS over the campaign also helps to build up a holistic picture.
Your Business’s Future Lies in Customer Lifetime Value Optimization
Customer lifetime value optimization isn’t a nice to have. It’s a concept that can make your ecommerce brand even more successful. By focusing on increasing your AOV, boosting Purchase Frequency, and extending Customer Lifespan, you unlock sustained growth and profitability.
The benefits of Customer Lifetime Value Optimization are clear. You’ll see a reduction in your customer acquisition costs, your marketing becomes more efficient, and revenue streams become more predictable as they’re built on a foundation of loyal customers.
When you invest in understanding and valuing your customers over their entire journey, you’re not just making a sale; you’re building a lasting connection.
By spending time on customer lifetime value optimization, you’re not just ensuring your brand booms today but also setting it up for enduring success well into the future.
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