There are a lot of crucial KPIs that ecommerce teams gather through software tools and historical customer data. Data points such as customer retention rates, customer behavior, churn probability, and customer acquisition costs are essential for predictive analytics and informed business decisions. Having enough data about your customer base and inventory can be a powerful tool for your company, helping you hone things like your email marketing campaigns and company decision-making.
One of these metrics that can be extremely helpful is the total customer lifetime value (CLV). Your CLV helps you understand your customer satisfaction similarly to your customer satisfaction score (CSAT) or your net promoter score (NPS) but ties this measurement directly to how much they purchase. Using customer lifetime value in combination with other metrics such as your customer acquisition costs can help you figure out what is and what isn't working in your acquisition and retention processes and let you know if your budget is focused on the most practical activities.
What is Customer Lifetime Value, and Why is it Important?
The customer lifetime value is the average worth of a customer during their entire lifecycle alongside your company. For example, if a customer has a subscription to your service, which costs $20 per month, and subscribes for an entire year, their customer lifetime value is $240 ($20 * 12 months). There are many ways you can use this metric to examine things like your customer's profitability by comparing this amount to your customer acquisition cost. Your CLV can also be broken down into different time frames or customer segments depending on your needs.
Many of us know that retaining customers costs less than bringing in new ones, making this metric vital to developing business strategies to keep customers and increase their value. Beyond that, CLV has a handful of different ways your team can use it to help you make better decisions and improve your forecasting. For example, you can gauge a customer's value through this metric, look at the number of people who have spent over a particular metric, or plan a loyalty program by looking at the average CLV.
Once you have your customer lifetime value and can appropriately segment it, you can start making more analytical, future-oriented decisions around your marketing tactics, costs, and inventory. It is easy to over or underspend without knowing how much your customers bring in profits on average. Knowing your CLV can also help you make more educated decisions on your customer acquisition costs, ensuring that you aren't overspending in gaining new customers and showing the ROI of customer retention initiatives.
What is the Difference Between CLV and LTV?
The difference between the customer lifetime value and lifetime value (and even the total CLV) depends on whom you talk to. Many teams use the term CLV and LTC interchangeably, along with lifetime customer value (LCV). Some groups like to use lifetime value as an aggregate metric across all of their customer bases instead of CLV being a metric measuring an individual customer. The preferences and practices used will change depending on your accounting team or company, so define these metrics early on each time you join a new team. Most commonly, however, you will see these terms used interchangeably.
How do You Find the Lifetime Value of a Klaviyo Customer?
Klaviyo has an impressive AI-powered customer lifetime feature that helps you make predictions for your customers. The tool lets you see the total CLV, the churn risk prediction, and the average time between orders for any customer. You also can build segments using these predictions, allowing you to look at data from the average order value to how much the customer has spent since their first purchase. Some of these segments include:
Historic Customer Lifetime Value (Historic CLV) - The total that a customer has spent on past orders
Predicted Customer Lifetime Value (Predicted CLV) - The approximated predicted spending of the customer based on their average customer profile
Total Customer Lifetime Value (Total CLV) - Predicted CLV + Historic CLV
Predicted Number of Orders - The predicted amount of orders over the next year is calculated by looking at their total number of orders over time
Average Days Between Orders - The average time between orders for a customer
Note that you will only be able to use these segments if: at least 500 customers have placed orders, you have an ecommerce integration (Magento, BigCommerce, Shopify stores) or use Klaviyo's API, have at least 180 days of order history, and have customers who have placed three or more orders.
How to Improve Your Customer Lifetime Value
There are many ways to increase your customer lifetime value; remember to look at other metrics as you make these decisions. While your total CLV is an excellent metric for making business decisions, if only looked at from a high level, you can miss glaring issues that only show within specific customer pockets. Segmenting these data categories and gaining a complete picture will help you decide how to approach improving your customer lifetime value without missing any hidden issues.
Increase customer loyalty
Avoiding loss of customers is a massive part of improving your customer lifetime value. The longer you keep happy, passionate buyers, the better your CLV will be. Remember that retaining customers is much easier than finding new customers, so focus on finding ways to see what is working best for those clients who are long-time buyers. Look at your different customer segments to see where things are working best and what groups of customers seem to have the lowest and highest churn rates. Finding ways to improve the customer experience and keep them brand loyal will dramatically increase your customer lifetime value.
Increase AOV or order frequency
Increasing your average order value is a great way to gain more profits and increase customer lifetime value. When finding tactics to increase your average order value, remember that taking a balanced approach of just raising your prices can be counterintuitive to keeping loyal, happy customers. Adding add-ons, additional services, or taking on other strategies may be a better option for your customer base.
Rather than focusing on increased average order value (or, perhaps in combination), you can instead try to focus on your order frequency. You can garner repeat sales through redesigned product release cycles, additional items requiring regular purchases, or new loyalty incentives to reward frequent customers. By increasing the number of orders made, you bring customers to your store more regularly and have more opportunities to make positive impressions on them.
Customer lifetime value is a vital metric that allows you to examine the monetary worth throughout their lifecycle with your company. Your CLV can be broken down by customer segment or different time frames for a more specific picture. Examining your customer lifetime value can help you find ways to better gain customer loyalty and increase their purchasing practices, whether through increased quantity or purchase value.
Knowing your customer lifetime value details can help you make crucial marketing decisions for customer acquisition, forecast business decisions, and even make intelligent inventory decisions based on buying practices. It is vital to use a tool like Klaviyo that can accurately track and segment these numbers so that you don't make assumptions based on high-level metrics that don't show you the whole story.
Tracking customer lifetime value is a great way to make educated decisions and track your progress on different initiatives. You can improve your CLV through various strategies, including increasing your customer loyalty, increasing your order frequency, and increasing your average order value. Regardless of how you utilize CLV for your business, ensuring that you have the tools to track and analyze this data is the first step to success.
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