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What is Customer Lifetime Value for Ecommerce & How to Track It

Adam
12 Jun 2024

When counting the tools available to ecommerce businesses, customer lifetime value is perhaps, the most pertinent of all.

That being said, how does one calculate customer lifetime value—and what are the potential drawbacks and benefits of taking the customer lifetime value formula into account?
Reaktion has a plug&play CLV calculator for Shopify, WooCommerce, Magento, BigCommerce, Shopware and many more ecommerce platforms. It might sound complex to calculate your CLV/LTV, but the good news is you can get your CLV served on a silver-platter in a few clicks.

In this article, we will delve into everything you need to know about customer lifetime value in marketing, the ecommerce customer lifetime value calculator, how this metric can help you effectively assess the health of your brand and strategies you can utilise to increase your customer lifetime value for ecommerce.

What is LTV in Ecommerce?

Before being able to answer the valid question “what is a good customer lifetime value?” you first need to understand its definition.

Customer lifetime value is an important business metric that calculates the amount of money a business can expect its average customer to bring in over the course of their interaction with said business.

The LTV ecommerce formula calculates the following factors:

It is imperative to understand that a higher customer lifetime value in marketing, is more than just increased business revenue.

It should be seen as an indicator of high levels of customer satisfaction and strong customer relationships.

Loyal customers can help your marketing efforts with word-of-mouth recommendations and positive reviews.

Reaktion Customer Lifetime Value for Ecommerce

How to calculate customer lifetime value

Calculating Customer Lifetime Value (CLV) in ecommerce is crucial for understanding the long-term value each customer brings to your business.

CLV represents the total revenue a customer is expected to generate throughout their entire relationship with your company.

By accurately calculating CLV, you can make informed decisions regarding marketing strategies, customer retention efforts, and overall business growth.

Here’s how to calculate it:

Gather Data

  1.  Start by collecting essential data points such as average purchase value, purchase frequency, customer lifespan, and retention rate.
  2. These metrics provide the foundation for your CLV calculation.

Calculate Average Purchase Value (APV)

  1. Determine the average amount of money a customer spends per transaction.
  2. This is calculated by dividing the total revenue generated by the number of transactions over a specific period.

Calculate Purchase Frequency (PF)

  1. Figure out how often, on average, a customer makes a purchase within a given period.
  2. This can be calculated by dividing the total number of transactions by the number of unique customers during the same period.

Calculate Customer Lifespan (CL)

  1. Estimate the average length of time a customer continues to engage with your business.
  2. This can vary depending on your industry and customer behaviour.

Calculate Retention Rate (RR)

  1. Calculate the percentage of customers who continue to do business with you over time.
  2. This can be calculated by dividing the number of customers at the end of a period by the number of customers at the beginning, then multiplying by 100 to get a percentage.

Once you have the underlining metrics, you can use the following customer lifetime value formula to calculate CLV:

CLV = APV X PF X CL X RR

The resulting CLV will give you an estimate of the total revenue you can expect from each customer over their lifetime.

This information is invaluable for making strategic decisions about marketing budgets, customer acquisition costs, and pricing strategies.

For instance, lets take this ecommerce customer lifetime value example:

If the average purchase value is $50, the purchase frequency is 2 times per month, the customer lifespan is 2 years, and the retention rate is 80%.

CLV = $50 X 2 X 2 X 0.80 = $160 

This means that, on average, each customer is expected to generate $160 in revenue over their relationship with your business.

Importance of Customer Lifetime Value

Customer Lifetime Value (CLV) is an important metric for ecommerce businesses, since it serves as a compass guiding strategic decisions and pushing businesses to sustainable growth and profitability.

Its importance cannot be overstated in the digital marketplace, where customer relationships are the cornerstone of success.

Strategic Decision-Making

CLV acts as a strategic compass for ecommerce businesses, providing insights into customer worth and guiding resource allocation.

When you understand the value each customer brings over their lifetime, you can make informed decisions regarding marketing strategies, customer acquisition costs, and product development efforts.

Customer Lifetime Value Analysis

Impact on Marketing Strategies

CLV shapes marketing strategies by highlighting the most valuable customer segments.

By identifying high CLV customers, businesses can tailor marketing campaigns to resonate with their preferences and behaviours.

This, in turn, maximises ROI and drives revenue growth.

Conversely, it helps identify low CLV customers, enabling targeted efforts to either re-engage or minimise investment in these less profitable customers.

Customer Retention

One of the most significant impacts of CLV is its emphasis on customer retention.

Acquiring new customers can be costly, making it imperative to nurture existing relationships.

CLV encourages ecommerce businesses to invest in customer retention efforts such as loyalty programs, personalised communication, and exceptional customer service.

When customer lifespans are extended, purchase frequency is increased, enabling businesses to enhance CLV and long-term profitability.

Long-Term Benefits

Focusing on CLV yields a plethora of long-term benefits for ecommerce businesses.

By prioritising customer satisfaction and loyalty, businesses can cultivate a loyal customer base that turn into advocates and repeat purchasers.

Moreover, as CLV increases, businesses become less reliant on costly acquisition channels, leading to improved margins and sustainable growth.

Predictive Insights

CLV offers predictive insights into future revenue streams, enabling businesses to forecast financial performance with greater accuracy.

Businesses can analyse historical data and trend to anticipate shifts in customer behaviour, identify growth opportunities, and mitigate potential risks.

Competitive Advantage

Businesses that utilises CLV gain a competitive advantage in the crowded ecommerce landscape.

This is because those that prioritise customer satisfaction, retention, and long-term value creation differentiate themselves from competitors focused solely on short-term gains.

By delivering exceptional customer experiences and maximising CLV, ecommerce businesses can carve out a distinct market position and foster brand loyalty.

Customer Lifetime Value for Ecommerce Formula

Customer Lifetime Value (CLV) calculation in ecommerce is pivotal for understanding the long-term profitability of customer relationships.

To accurately use the ecommerce customer lifetime value calculator, businesses must consider various segments that capture customer behaviour and business dynamics.

With that in mind, here is a breakdown of the CLV formula specific to ecommerce and how it differs from a general CLV calculator:

Factors Needed for CLV Calculation

Average Purchase Value (APV): This represents the average value of consumer transactions.

Average Gross Margin: It denotes the proportion of consumer purchase that constitutes profit after deducting the cost of goods sold from total revenue.

Purchase Frequency: This indicates the average number of transactions a consumer makes within a specific period.

Customer Lifespan: The duration of the customer-business relationship, which may vary across different industries and business models.

Customer Acquisition Cost (CAC): This encompasses the average expenses incurred in acquiring a customer, including marketing, advertising, and incentives.

Formula for CLV in Ecommerce

CLV = (Average Purchase Value X Gross Margin X Purchase Frequency X Customer Lifespan) – CAC 

This formula accounts for both revenue generated and costs associated with acquiring and maintaining customer relationships.

By subtracting the Customer Acquisition Costs from the total expected revenue, businesses obtain a comprehensive view of the net value derived from each customer over their lifespan.

What makes Reaktion’s CLV analysis unique?

How Does This Customer Lifetime Value Formula Differ From General CLV Calculator?

While the formula outlined above provides a custom approach best suited for ecommerce businesses, a general CLV calculator typically offers a more standardised approach.

General CLV calculators rely on simplified inputs such as average revenue per customer, churn rate, and discount rate to estimate CLV.

The key distinction between both formulas lies in the specificity of inputs and the depth of analysis.

Ecommerce-focused CLV formulas go deeper into a business using granular metrics like purchase frequency and gross margin, providing a nuanced understanding of customer value within the context of online retail.

In contrast, general CLV calculators offer a broader perspective applicable across various industries, making them more accessible for businesses with diverse customer bases and revenue streams.

Why Choose Reaktion?

Reaktion’s CLV analysis stands out for its comprehensive approach and unique features.

What is a Good Customer Lifetime Value for Ecommerce?

In ecommerce, a good Customer Lifetime Value (CLV) typically exceeds three times the Customer Acquisition Costs (CAC).

This benchmark is a crucial indicator of profitability and sustainability in online retail.

CLV lower this threshold means the business requires significant and strategic interventions to improve customer value and maximise returns on investment.

There are a plethora of factors that influence a “good” CLV in ecommerce.

Some of them include: industry dynamics, customer behaviour, and business model.

CLV benchmarks can vary across sectors, with some industries inherently commanding higher customer lifetime values due to factors like product pricing, customer loyalty, and repeat purchase patterns.

For instance, subscription-based businesses may boast higher CLV figures compared to one-time purchase models, as subscribers tend to exhibit greater loyalty and engagement over time.

On the flip side, industries characterised by low margins and high competition may struggle to achieve robust CLV figures, therefore requiring innovative approaches to customer retention and value creation.

Furthermore, industry-specific variations in CLV underscore the importance of contextually relevant benchmarks.

What constitutes a “good” CLV in fashion retail, for instance, may differ from that in the electronics or grocery sectors, reflecting distinct consumer behaviours and purchase cycles.

Ultimately, a good CLV in ecommerce goes beyond numerical benchmarks.

It considers strategic alignment with business objectives, customer-centricity, and long-term value creation.

Ecommerce businesses need to continuously evaluate and optimise CLV metrics in relation to acquisition costs and industry benchmarks.

Doing this can enable them to unlock sustainable growth opportunities and thrive in the digital marketplace.

This overarching approach to analysis empowers ecommerce businesses to optimize their marketing efforts, product offerings, and customer relationships for maximum profitability and long-term success.

How to Increase Customer Lifetime Value in Ecommerce

Increasing Customer Lifetime Value (CLV) in ecommerce is essential for businesses that want sustained profitability and growth.

Strategies to boost CLV typically focus on enhancing customer satisfaction, fostering loyalty, and maximising long-term value.

Personalised marketing and loyalty programs play pivotal roles in achieving these objectives.

The first thing ecommerce businesses should do is to ensure exceptional customer satisfaction through superior product quality, seamless shopping experiences, and responsive customer service.

These are key to improving CLV.

Satisfied customers are more likely to make repeat purchases and recommend the brand to others, thereby driving revenue and extending their lifetime value.

Moreover, implementing personalised marketing initiatives tailored to individual preferences enhances engagement and strengthens customer relationships.

When ecommerce businesses leverage data analytics and customer insights, they can deliver relevant content, recommendations, and promotions that resonate with each customer, driving higher conversion rates and CLV.

Businesses can also use loyalty programs, as they incentivise repeat purchases and reward customer loyalty, thereby increasing CLV.

Offering exclusive discounts, perks, and rewards for frequent shoppers encourages continued engagement and strengthens brand affinity, leading to higher CLV and customer retention.

What is the Lifetime Value of a Customer on Shopify?

Shopify emphasises a holistic approach to Customer Lifetime Value (CLV), considering factors such as average order value, purchase frequency, customer retention, and engagement.

Several unique factors influence CLV on Shopify, including the platform’s extensive suite of apps and integrations.

Which enable merchants to enhance customer experiences and drive repeat purchases.

Additionally, Shopify’s scalable infrastructure and robust analytics enable merchants to track and optimise CLV effectively.

Shopify merchants can leverage built-in analytics tools, such as Shopify Analytics and third-party apps, to gain insights into customer trends, identify high-value segments, and implement targeted strategies to increase CLV.

Conclusion

Understanding and optimising Customer Lifetime Value in ecommerce is essential for businesses looking to achieve sustained growth and profitability.

Therefore, leveraging tools such as the ecommerce customer lifetime value calculator, ecommerce businesses can effectively assess their brand’s health and implement essential strategies to increase CLV.

While tracking CLV can be quite difficult, especially for small organisations, there are efficient solutions such as the product provided by Reaktion that helps cut through the meat of the important metrics; providing key information on what brands and businesses need to do.

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