For eCommerce businesses, especially Shopify store owners, understanding and maximising your Customer Lifetime Value (CLV) is crucial to long-term success. CLV helps you project revenue growth, make informed business decisions, and optimise your marketing efforts. At Blend Commerce, we specialise in enhancing CLV through our CRO Plus Program, using advanced strategies like the CVO Methodology to drive sustained growth.
It's competitive out there and acquiring new customers is becoming increasingly expensive, while the value of retaining and nurturing existing customers has never been more important. Customer Lifetime Value not only helps businesses like yours understand the worth of each customer, but also shapes how you engage and serve them in the future. By focusing on optimising your CLV, you're investing in both the present and future of your brand's growth.
This post will walk you through:
- What Customer Lifetime Value is and why it's vital for your Shopify store.
- How to measure your current CLV.
- Proven strategies for extending your CLV through a more personalised and seamless shopping experience.
- And finally, why investing in CLV is a more cost-effective strategy compared to acquiring new customers.
What is Customer Lifetime Value?
Let’s start by exploring exactly what Customer Lifetime Value (CLV) means in the context of your Shopify store. While CLV can vary across different types of businesses, in eCommerce, it represents the total revenue a customer is expected to generate during their entire relationship with your brand.
By calculating and tracking CLV, you gain valuable insights into customer loyalty, satisfaction, and behaviour. More importantly, CLV helps guide your decisions on where to invest your marketing resources and how to tailor your customer experience to maximise retention and repeat purchases.
Customer Lifetime Value (CLV) helps you determine what value a well-treated customer can add to your business. It can also indicate customer satisfaction or dissatisfaction, as happy customers often return, and unhappy ones will not give you business again.
Why Should You Measure LTV?
Once you understand what Customer Lifetime Value is, the next question is - why should you measure it? Knowing your CLV allows you to unlock critical insights about your customers and your business. For Shopify owners, it's not just about driving that initial conversion but fostering an ongoing relationship that encourages customers to return again and again.
Your LTV directly impacts your profitability. If it costs you £20 to attract a new customer and they only spend £18 in their lifetime with your business, your customers are actually costing you £2. But if, in the same scenario, your customers are spending £500 in their lifetime with you, you're increasing the profitability of your store.
Similarly, if you can prevent a customer churning after their first purchase or after 6 months, and keep them coming back to purchase again and again, you'll increase the amount of money you make from that customer, impacting your overall profitability.
By measuring your Customer Lifetime Value (CLV) or LTV, you can determine if your products or business are leaving your customers satisfied. You can identify gaps in your marketing strategy or build new strategies to grow your CLV.
Understanding your CLV or LTV can also help you improve your forecasting and help you make decisions about your customer acquisition costs (CAC). You may even be able to reduce your acquisition costs and improve retention rates once you know your CLV.
For example, if you find that your customer value is low, you can create a promotional plan to reward customers who are at risk of churning to bring them back to your store, or can use email marketing to encourage returns.
How do you measure Customer Lifetime Value?
Accurately measuring your CLV is key to ensuring your business strategy is working to improve long-term revenue. We'll walk you through the steps to calculate CLV using metrics like Average Order Value (AOV), transaction frequency, and customer retention rate. Many of these metrics are readily available in your Shopify analytics,. While it appears to be a simple metric, this can be tricky to determine manually using your Shopify analytics alone.
Follow these four steps to determine your customer lifetime value:
- Calculate your Average Order Value (AOV): You will have likely already calculated this, as it is an important eCommerce metric. If you have not, use data from the last three months, and divide the total by the number of separate sales your business has made. Or you can find this aggregated metric within your Shopify analytics in the admin.
- Determine the average number of repeated transactions per period: Depending on your type of business, the frequency of visits in an important metric. For a local coffee shop, this might be three times a week, while a shop that sells running shoes will see repeated visits once or twice a year.
- Measure customer retention: The last thing you want to determine is the loyalty of your customers - how long do they use your brand for? Are they a customer once, for a year, or for ten? This is possibly the most important metric when determining LTV, as it indicates customer satisfaction.
- Calculate your Customer Lifetime Value: You now have all three metrics needed to determine your LTV. Use the following formula to calculate your customer lifetime value. CLV = Average Transaction Size x Number of Transactions x Retention Period.
An example of CLV would look like this: CLV = £3 (average sale) x 50 (annual visits) x 5 (years) = £750
There is always a risk of mistakes when it comes to manual calculations. At Blend, we rely on tools like Omniconvert or Lifetimely to accurately calculate and track CLV and LTV to ensure we uncover insights and recommendations to help you drive these important metrics for long-term business growth.
How do you extend Lifetime Value?
Understanding your Customer Lifetime Value is just the beginning. The real magic happens when you take actionable steps to extend it. Improving CLV comes down to creating a better experience for your customers. This could be through personalised offers, loyalty programs or enhanced customer service.
We'll discuss some effective strategies you can use to boost CLV, and how Blend's CRO Plus Progam helps Shopify stores like yours to implement them.
The key to extending LTV is personalisation and there are so many strategies you can employ to help you personalise your customers experience.
Build an Onsite Quiz
An onsite quiz is a great way to collect zero-party data about your customers. You can obtain valuable information about their preferences. Octane AI is a third-party app that allows you to create an interactive quiz on your Shopify store for your customers and potential customers to explore. Your customer will move through a series of strategic questions and select their answers. Each answer will be stored as a tag on their profile property within tools like Klaviyo. And at the end of the quiz, you can capture their email address and they will receive personalised product recommendations onsite.
You can then take this a step further and use segmentation within your email marketing to create targeted flows or campaigns that will show your customer products and content based on their preferences.
The results is an increase in customer engagement, tailored marketing and messaging and higher conversion rates.
Advanced Segmentation in your Email Marketing
Although we have already touched on segmentation through email marketing based on an onsite quiz, there are other tools you can use to segment your audience in your ESP account.
If you are using Klaviyo, you could create advanced segmentation within your Flows and Campaigns based on RFM Segmentation through Klaviyo CDP. There is also a great tool called Omniconvert that can establish your RFM segments that integrates with Klaviyo and you can leverage this to tailor your marketing based on the customer segment that you're trying to target.
By providing relevant information at the appropriate time to your customers, you increase the likelihood that they will make a purchase. Thereby, increasing your purchase frequency and, as a result, their Customer Lifetime Value.
Cross-Sells and Upsells
Part of your Customer Lifetime Calculation is the element of your Average Order Value (AOV). Rebuy is a third-party app that integrates with Shopify to help you personalise the shopping experience your customers have on your store. Through Rebuy, you can implement "You May Also Like' sections on your Product Page, you can offer dynamic bundles too and there is also a Smart Cart, which incorporates both cross-selling opportunities and gamification in the cart. Rebuy also offers you the choice between using their powerful AI product recommendations, which is based on user behaviour, or you can you implement your own rules through the Rebuy data set.
Here are some additional strategies you can use to increase your CLV:
- Improve customer service and experience
- Create customer loyalty and reward programs
- Use social media and marketing to improve brand awareness
- Improve customer onboarding and engagement
- Use technology and software to make sure your site is fast and easy to use
Extending Lifetime Value vs Acquiring a New Client
It's a common dilemma for eCommerce businesses. Should you invest in acquiring new customers or focus on extending the value of your existing ones? While acquiring new customers is important, it really is, retaining and maximising the value of your current customers often results in a higher return on investment.
Acquiring new customers is an expensive task. Investing resources in extending Lifetime Value can have better return on investment than acquiring a new client. The resources required to convert a brand new client are often extensive, as the potential customer needs to find out about your brand, and trust it before making a purchase. While a good marketing strategy can achieve this, it is often easier, and cheaper, to work with your current clients. This doesn't mean that acquiring new customers isn't important. Just the opposite. But there are ways to leverage your existing customers to drive your revenue and profitability.
If you are able to drive your Customer Lifetime Value, if you kept your cost of acquisition the same, you would make more money from your customers, on average. This means that your cost of acquisition remains the same, but your revenue has grown, thereby increasing your return on investment into acquisition as well as increasing your bottom line.
Elevate your Shopify Growth by Enhancing Customer Lifetime Value
Understanding and maximising Customer Lifetime Value is essential for the long-term success of any eCommerce business. CLV helps you forecast revenue, optimise marketing strategies, and make smarter business decisions by focusing on the value of retaining your existing customers.
As we have explored, the concept of Customer Lifetime Value (CLV) and its significant impact on your business, explaining why measuring CLV is crucial to boosting profitability, you should now be able to calculate CLV using key metrics such as Average Order Value (AOV), transaction frequency, or purchase frequency, and customer retention and have a better understanding of strategies you can use to create personalised experiences for your customers to bolster their LTV.
It should be clear that focusing on CLV allows you to enhance customer loyalty and maximise the return on your acquisition investments, resulting in increased revenue and longer-term growth.
If you're looking to improve your Customer Lifetime Value and optimise the performance of your Shopify store, discover how Blend's CRO Plus Program can help drive results using advanced CVO Methodologies.
Published: March 15, 2022
Last updated: October 11, 2024
