For Retailers

Customer Lifetime Value: How to Calculate and Analyze LTV

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Customer Lifetime Value

It is pretty easy to be excited by how many products you’re selling. What you might not consider as often is how many of those product sales are repeat customers. How many of your customers buy from you again? 

A lifetime value analysis can help you decide just how much your customers are worth to you. Don’t consider just the short term, but a lifetime of business together. Using a customer lifetime value formula can help you to shape your marketing to increase customer lifetime value.

What is customer lifetime value?

Customer lifetime value (CLV) or lifetime value (LTV) is an expected profit margin throughout a relationship with a customer. This profit takes into account the costs of attracting and keeping a customer. These include marketing expenses, operation costs, and the cost to produce the goods or services being sold.

It can be tempting to work for a single sale and not worry about lifetime sales. After all, monthly sales are a straightforward bottom line. However, failing to work towards understanding the value of and retaining existing customers is a mistake.

A customer’s value over a lifetime is monetarily much higher than achieving new sales from customers who don’t purchase again. A loyal customer who keeps buying from you through the years is more likely to recommend your business. They may pay more despite more affordable competitive products or services.

Is retaining customers important?

Your company is bound to gain and lose customers over its lifetime. Still, your goal should be to keep as many loyal customers as you possibly can. Keeping customers may not be as exciting as getting new ones. 

Too many executives focus on marketing campaigns designed to draw in new customers rather than retaining current ones. Depending on your industry, it can cost from around $10 to nearly $400 to gain each new customer.  It may cost as much as 5x and 25x more to get a new customer than keep an existing one.

Keeping customers may be much more affordable. The lifetime value of each customer makes it well worth your while to put effort into keeping them. Keeping only 5% more customers may increase your profits from around 25% to as much as 95%.

Simple customer lifetime value calculator

Length of relationship (C) X Sales per customer (B) X Sale value (A) = Lifetime value of customer.

Customer Lifetime Value Calculator

A. sale value

B. average amount of sales per customer

C. length of the business relationship

The better your data, the more likely you will be to estimate an accurate lifetime value. Remember that this estimate doesn’t take into account any of the expenses involved in attracting a customer. It also doesn’t include the operating expenses of your business or online store.

If you estimate what percentage your profit margin is, you can determine your final LTV. 

Say that you have a customer who usually spends around $100 per sale and shops twice a year for three years. To calculate the LTV before expenses, this would be your formula:

$100 X 2 X 3 = $600

To find out how much that customer is worth over their lifetime after expenses, simply multiply the total by your profit margin. This is determined by subtracting the costs of overhead, marketing, etc. If it was 30%, your formula would be

$600 X 30% = 180

Naturally, the amount that you spend will detract from your bottom line in customer value. Attracting a customer, maintaining your business, and producing your products all hurt your income. The more customers that you can keep, the less you’ll need to spend on marketing costs to attract new customers.

Factors that go into how to calculate customer lifetime value

Understanding the data needed to calculate CLV can be a challenge. Collecting this information isn’t always straightforward. Sometimes understanding the results can be frustrating. Here are a few dynamics that are important to know when calculating LTV.

Churn rate

The churn rate, or rate of attrition, is determined by how often customers stop shopping with a business. This number will vary dramatically from business to business. Retailers who often have products go in and out of fashion may experience a higher churn rate. Businesses whose average customer barely thinks before making the same purchase, like necessity producers, will experience lower churn rates on average.

Some simple math is necessary to determine your churn rate:

Subtract the customers that you have at the end of the period from the customers you had at the beginning.

Divide that number by how many customers you had at the beginning of the period.

Customer Churn Rate Formula

Beginning of period: 10,000 customers

End of period: 9500 customers

Churn rate: 10,000 – 9500 = 500

500 \ 10,000 = .05, or 5%.

That means your churn rate would be 5%. 5% of the customers who previously chose to patronize your business went somewhere else this period.

Customer loyalty

The loyalty of your existing customers will determine how likely they are to stay with you. Learning trends about the overall commitment of customers can also help you to understand what your brand is doing to shape loyalty in new customers. Businesses with high loyalty will tend to have much lower churn rates. 

A loyal customer can organically increase customer numbers with word of mouth and social media marketing. The more dedicated your customers are, the higher customer retention is likely to be. This results in greater customer lifetime value.

How to increase customer lifetime value

Whatever your current average customer lifetime value, you probably are looking for ways to increase it. After all, the CLV is directly related to your income and indirectly related to the success of your business.

Make a good first impression

If you want to begin inspiring loyalty to develop a lifelong customer, it’s a good idea to start at the beginning. Work on your impression from the first time that a customer interacts with your store until they are years into making repeat purchases. Throuhgout the experience, you want to encourage them to feel positively towards your brand.

Make sure that each customer understands the assets of your products as soon as they enter your store or eCommerce business. Customers can quickly grow bored or disconnect. You want them to understand the value of your products or services quickly. 

Optimize your website landing pages, social media platforms, and physical spaces so that they make a great impression. You also want to inform customers about the best that your business has to offer.

Communicate your core values

Even before your customer begins shopping with you, you want to be in communication. Good bots in social media and on your website can prompt a conversation as soon as a customer views your site. 

As your customer progresses with shopping, suggest related items, offer coupons or discounts, or provide assistance. Be sure to respond to all communication, even and perhaps especially to negative feedback.

Grow your loyalty program

This is a straightforward way to increase existing customer loyalty and improve the average customer lifetime value. Furthermore, such programs encourage customers to patronize your business more often. Reward points are an excellent way to build a strong loyalty program. 

If your customer is thinking of going elsewhere, reward points may draw them back. A special gift or coupon along with a new reward card when they cash in may make it hard for them not to come back.

Unlock free or discounted products

It’s fun unlocking a free product after a number of purchases. Offering unique products that can only be won by unlocking them can make it even more exciting.

Retarget to engage lost customers

If you’ve lost a customer, it’s worth finding a way to re-engage them. Retarget your marketing and communication campaigns. Appeal to whatever it is that your customers liked in your products before while addressing possible reasons for leaving. 

If you believe that you have lost customers to lower-priced competitive products, consider offering a popular product at a reduced cost. Alternatively, offer a reason to pay more, like a charitable cause.

Utilize cause marketing

Cause marketing is an excellent way to build customer lifetime value and overall loyalty. If your customers believe that you share in their values, they may be willing to spend more

You may also keep customers who would otherwise be looking elsewhere for a brand with a cause. 64% of people avoid brands if they don’t believe in the social impact that the company is making. A third of customers have stopped buying from brands since 2019 because they don’t trust the brand or its commitment to social well-being. 

Your churn rate may already be affected by customers leaving because they don’t know what you stand for. By choosing a cause, you can immediately reduce the churn rate. 

Your cause-related marketing can be integrated throughout your marketing campaign. Have a donation app attached to the checkout process or mention the cause in emails reminding customers about abandoned shopping carts, and much more. 

Put your customers in your content

Social media posts aren’t just a great way to share important information about your company. They’re a great way to connect directly and build trust with your customers.

A customer is much more likely to stay with your business for the long term if you’ve posted their picture in social media or shouted out to them in a post or comment. If you’re a clothing brand, encourage customers to send in pictures of them modeling your clothes and post the pictures.

Invest in automated email marketing

Email marketing can be a very useful way to reduce your churn rate. Specific email marketing is especially effective. An email prompting clients to finish shopping when they have abandoned their carts can directly result in income as well as keeping customers. This marketing can also improve consumer experience while increasing purchases. 

An average conversion rate of .09% may not sound like much. However, consider how little effort and investment it requires to put an automated email campaign into place. This is a small investment that has meaningful value for your company. 

Some instances of email interaction may be even more successful. For instance, for fashion and apparel, there was a 3.47% conversion rate among welcome emails. It makes sense that welcome emails would do better, since emails were willingly given. However, still, this is an amazing conversion rate for the expense required.

Make a personal connection

At a time when so much is automated, a personal connection has a special value. This value is too often forgotten in a customer lifetime value model. Making a personal connection with your client is worth a lot. Sending a letter or gift or remembering a special occasion can go a very long way. 

Such gestures build loyalty in the customer. It also makes it more likely that they’ll stay with you and purchase more throughout their lifetime.

Be flexible and take advice

One of the best ways to keep a client for a lifetime is to listen to them. Customers appreciate having their opinions taken into account.

Incorporate a customer’s suggestions into your product design or marketing plan. This will make it more likely to keep not only the customers who made the suggestion but other customers who are inspired by your willingness to take a suggestion.

Improve customer lifetime value with cause marketing

If you want to increase each of your client’s value to you over their lifetime, cause marketing is one excellent technique. Cause marketing will improve loyalty throughout your customer experience. It is effective from the moment customers become aware of your brand and through many purchases throughout their lifetime. 

If you care about and value CLV and want to give cause marketing a try, ShoppingGives can help. We can integrate cause marketing throughout your marketing plan to help you improve your average client value.