How to Increase Customer Lifetime Value for Ecommerce
Do you want your ecommerce business to thrive beyond just short-term sales and revenue? Then, you need to learn about the customer lifetime value (CLV).
Learning about the CLV can help you accurately predict your customers' worth. This prediction will reveal key insights about who your best customers are, how to attract more of them, and how to profit more from your existing customers.
In this article, you’ll see what CLV is all about and how to calculate it. Then, you’ll see five proven tactics that will help you increase it and take your business to the next level.
Customer lifetime value: a definition
Customer lifetime value is the total amount of money a customer is expected to spend on your ecommerce store for as long as they remain customers.
By calculating the CLV, you can determine the average revenue you can expect to generate from each customer.
In turn, this can help you define a maximum acquisition cost to ensure your business’s profitability.
With your CLV, you can segment your best customers — those who spend more and buy more often — message them to maximize your sales and learn more about them so you can find more people like them.
Calculating the customer lifetime value for an ecommerce store
The CLV is made of three metrics:
- The average order value (AOV)
- The number of times a customer will purchase over their lifetime (i.e., the purchase frequency)
- The time they will remain a customer
Finding the data for the first two metrics is relatively easy, especially if you’re using one the popular ecommerce platforms. For instance, with Shopify, you can find the AOV in your analytics dashboard.
To calculate your purchase frequency, you need to divide the total number of orders by your total number of unique customers — which you can find in your analytics dashboard.
Measuring the average customer lifespan is trickier as it requires modeling different customer life expectancies based on your data. For most brands, especially newer ones, analytics expert Avinash Kaushik recommends using three years as an average benchmark.
Once you have the three metrics in place, multiply them. In the end, the customer lifetime value formula looks as follows:
CLV = Average Order Value * Purchase Frequency * Customer Lifespan
Now that you know what the customer lifetime value is and how to calculate it, let’s get knee-deep into the tactics you can use to increase it.
A strategic guide to CLV marketing: 5 tactics to apply
1. Create a repeat-purchase email flow
Increasing the purchase frequency can be boiled down to the task of reminding the customer to shop again in your store. This is what a repeat-purchase email flow is all about.
Sadly, most companies don’t use specific flows for this purpose. Instead, they send unenthusiastic, poorly-segmented promotional campaigns to their customers.
According to one report, repeat, loyal customers only represent 8% of a store’s traffic, yet they represent 41% of their revenue.
So, if you haven’t done anything to gain repeat customers, it’s time you do.
To get repeat customers, they must have a reason to shop again. It’s your job to find this purpose and highlight it in your emails. That could be:
- A product recommendation tailored to them, usually based on past purchases
- A popular product(s) other customers like them bought
- A popular product soon to be out of stock, possibly due to a seasonal change
- A complimentary product to the one they purchased (that’d be a cross-sell, which we’ll talk about later on)
- A gift or incentive you give away to thank them for their past purchases or loyalty
You can reach past customers by creating an automation in your email marketing platform targeting those who have placed at least one order but haven’t canceled any (just to ensure you target people who actually got their orders).
Trigger your first email some time after the customer’s last purchase. For example, if you know people take an average of 90 days between purchases or to make their second purchase, you can trigger the flow between 60 to 120 days after someone places an order.
In this case, your flow could give them product recommendations or a discount to incentivize their next purchase.
Alternatively, you can use a different angle and ask for a product review first, and send recommendations and incentives later on. Trigger this flow 15 to 45 days after their purchase. In Klaviyo, an email marketing platform for ecommerce, it would look like this:
Whatever option you choose, if your email marketing platform integrates with your ecommerce platform, you will likely be able to create such automation.
2. Create a loyalty program
Having loyal customers who shop regularly is the dream of any ecommerce store owner.
A loyalty program is meant to fulfill that exact goal. Customers get rewarded for purchasing, and the company ensures they shop with them often. Regardless of the method you use to reward your customers — points, tiers, vouchers — what they get from your program matters.
According to one study, consumers like loyalty programs that include:
- Exclusive discounts
- Early access to sales
- Early access to new products
- Personalized recommendations
Ultimately, your loyalty program should be focused on building brand loyalty. That means making your customers trust your company, as this survey by Shopify explains:
To create a loyalty program, start by defining how you want to reward your customers and what you want to offer them. That can be any of the ideas previously mentioned, plus things like free shipping and faster support.
To keep it simple, you can create a program that gives exclusive offers to your customers. For example, if you’re on Shopify, you can use apps like Smile, Rivo, or Yotpo. Such apps are designed to make it easy to create loyalty programs from scratch, even if you have no such experience.
Finally, deliver the perks regularly to make your customers feel appreciated.
3. Upsell and cross-sell
Selling to an existing customer is always easier than to a new one. Selling a product that improves or relates to a past purchase is even easier.
That’s what upsells and cross-sells are all about.
As Jordan Henri explains, an upsell is “a sales technique used to persuade a customer to upgrade their current purchase through premium versions of their product.“
In contrast, cross-selling “involves persuading a customer to purchase products that are related or complementary to those they’ve already purchased.”
If you’re on Shopify, you can use a recommendation engine in your product pages, such as ReConvert, Rebuy, or Zoorix to start with these tactics.
To make your cross-sells work, you want to position them as:
- Popular products other customers like
- Products purchased by people like them (i.e., the visitor)
- Products they might need
- Products that go well with the product seen
- “Complete the look”
(You can also bundle different products, which count as cross-sells, but we’ll cover that in more detail in the following section.)
To upsell on your product pages, you’ll have to take a more tailored approach, as you’ll be suggesting improvements and not simply add-ons.
Some common upsells you can use are:
- Newer versions of the given product
- Higher-capability versions (e.g., a gadget with greater storage capacity)
- Extended guarantees
- Digital products that educate the buyer on the product
- Buy-one-get-one (BOGO) offers
If you choose to use popups to recommend products to your customers, timing is key. For example, you want to trigger them when someone clicks an add-to-cart button or opens their cart to start the checkout process – in the latter case, it’s called offering an order bump.
You must also ensure the recommendations fit the selected product 👇
Finally, you can send emails triggered based on past purchases and targeted to specific products. In the former case, you want to filter the campaign, so it’s only sent when someone buys a particular product from your collection.
However, if you want to keep it simple, you can trigger the campaign a few hours or days after someone purchases from you and offer related products, like in the example above.
4. Bundle and recur
Everybody likes discounts. Ecommerce stores can increase sales (and the AOV), while customers get a product they may haven’t got otherwise.
However, as you’ll see in the next section, lowering your prices indiscriminately will do nothing but lose you money. But not product bundles.
A product bundle is a practice of selling two or more similar products under one SKU at a lower price than if the products were purchased individually.
As I explained in this article, bundling increases the perceived value of the bundle and motivates a purchase by discounting the products.
According to one study, bundling works best when the products match a given price or value. Think of a gadget with an extended (but discounted) guarantee or a powdered nutritional supplement with a shaker.
Shopify apps like Bundler and FC Simple Bundles & Kits will let you get started with your bundles quickly at a low cost.
Another option is to discount your products with a subscription — that is, using a recurring revenue business model. This ensures a consistent revenue stream for you and a good deal for the customer.
You can even bundle and sell products recurrently like Huel does. In any case, recurring sales are great, but they must be set up correctly to work.
According to McKinsey, 43% of subscribers churn due to a lack of “good value for price” and 30% due to a lack of “new or fun items or experiences.”
When setting up your recurring sales, you should always highlight the value your customers get while also offering new products.
That could be offering a sample (a great strategy to increase the AOV), a new product from your line, or a purchase discount.
As effective as it can be, subscription selling comes with some challenges. However, it can work wonders for companies in the health, nutrition, grooming, beauty, and pet food industries.
If you are interested in selling recurrently, and your store is running on Shopify, you can use apps like Appstle and Recharge.
5. Use incentives (but not just discounts)
Incentives are often used as synonyms for discounts. After all, discounts incentivize sales.
However, in the most literal form, an incentive is anything that makes it easier for a buyer to complete a purchase. This definition may be too broad, so to make it more specific, think of incentives as any tactic you use to reduce monetary objections.
Look at the most common reasons why people abandon their cart, and you’ll see the first, by far the largest, and fourth ones are monetary.
By giving a discount, you’ll make it easier for someone to buy… except that discounts lower your profit margins in the short term. Unless you know that people tend to buy repeatedly or at high volumes, you may want to think twice before using them.
To add salt to injury, discounts can make your brand look cheap or “anchor” people to low prices (that means they’ll expect to pay discounted prices).
Discounts are just one type of incentive, but not the only one.
There are monetary and non-monetary incentives — the former having an explicit monetary value tied to it and the latter not.
Common monetary incentives are:
- Free shipping discounts
- Time-sensitive discounts (e.g., a sale)
- Segmented discounts (i.e., only applicable for specific people, like past buyers)
- Loyalty-based discounts (i.e., those that your loyal program’s members get)
- Behavioral discounts (i.e., only applicable when someone does something you want, like writing a review)
- Referral discounts (i.e., one that someone gets after referring a friend)
- Seasonal discounts (e.g., for the end or beginning of a season)
- Free gifts with purchase
- Buy-one-get-one free (BOGO)
- Buy-more, save-more discounts
To start with monetary incentives, you can use free shipping thresholds. Since they require a customer to hit a specific purchase target, they can incentivize a sale while increasing your AOV.
Also, you can discount exclusively to high-value segments. These can include past customers, highly-engaged subscribers, or both.
Finally, consider offering free gifts with future purchases. You can combine the gift with a given threshold to minimize the impact of the discount.
As for the non-monetary incentives, you have:
- Fast and clear shipping times
- Fast, free, no-hassle returns
- Diverse payment methods (including buy-now, pay-later)
- No special handling or shipping fees
- Clear taxes (i.e., charge the sales or value-added taxes upfront to avoid surprises in the checkout)
- Simple checkout processes and forms with as few pages and inputs as possible
- Fair pricing in relation to the industry—if not, it should be clear why it’s higher than the competitors’ products
- An error-free, fast-loading store (especially on the checkout page)
- A clear, user-friendly design
Non-monetary incentives are generally more powerful and less costly than monetary ones. However, they go beyond a simple coupon; they are part of your business strategy.
Even when you decide to use discounts, you must remember to consider their financial impact and the importance of non-monetary incentives.
Increase your customer lifetime value: a TL;DR guide
Increasing your business’ profits is an essential but tough proposition. Undoubtedly, you want to grow them as much as possible without shattering your reputation or lowering your sales.
By boosting your customer lifetime value, whether by increasing your AOV or frequency, you will make more money for a longer time. All without having to acquire new customers.
Remember the formula: CLV = AOV * frequency * customer lifespan.
To summarize everything you saw today, the five tactics you can use to increase your CLV are:
- Run email flows for repeat purchases
- Create loyalty programs that reward customers
- Use upselling and cross-selling in your product pages, popups, and emails
- Bundle your products and, if possible, use subscriptions for stock refills
- Use incentives, both monetary (e.g., free shipping thresholds, free gifts with purchases, etc.) and non-monetary (e.g., fast shipping, simple checkout pages)
Ivan Kreimer is a freelance content writer for hire who creates educational content for SaaS businesses like Leadfeeder and Campaign Monitor. In his pastime, he likes to help people become freelance writers. Besides writing for smart people who read sites like Getsitecontrol, Ivan has also written in sites like Entrepreneur, MarketingProfs, TheNextWeb, and many other influential websites.
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You're reading Getsitecontrol blog where marketing experts share proven tactics to grow your online business. This article is a part of Ecommerce marketing section.