Ecommerce Encyclopedia

‟Ecommerce is a powerful means to connect the unconnected to global trade” - Arancha Gonzalez

What is customer lifetime value

The definition of Customer lifetime value:

Customer lifetime value is the total revenue generated from a single customer account. Focusing on CLV allows you to identify significant customer segments that bring more revenue than others, then design an efficient strategy of customer acquisition and customer retention.

  • Customer Lifetime Value Formula: Multiplying customer value by the average customer lifespan to get a glimpse of the total profit you can expect to gain from an average customer to generate for your company over the course of their customer lifespan. 
  • Average purchase value: Dividing your company’s total profit throughout a specific time period (one year in most cases) by the number of purchases in that same time period.
  • Average purchase frequency rate: Taking the number of purchases which were made in a specific time period and dividing that number by the number of unique buyers you had during that same period.
  • Customer value: Multiplying the average purchase value by the average purchase frequency rate.
  • Average customer lifespan: Calculating the average number of years in which a repeat customer purchase from your business.

Improving Customer Lifetime Value

Once having known customer lifetime value, is there any way to improve it? In fact, it is safe to say that there exists several methods to maximize your business’ profit. However, two main methods to help you increase your customer’s CLTV are customer satisfaction and customer retention.

  • Customer Satisfaction

Ensuring customers’ satisfaction will usually result in higher revenue. HubSpot Research’s study showed that 55% of growing companies agreed that investing in customer service programs is “very important” . Meanwhile, taking a closer look into businesses having stagnant or decreasing revenue, only 29% said this investment was “very important”. Companies that directly opt for customers’ happiness are expected to earn higher profit, thanks to increased customer satisfaction.

  • Customer Retention

Having a new customer for your business can be quite pricey. According to an article published by Harvard Business Review, acquiring a new customer could cost you anywhere between five and 25 times higher than the cost of retaining an old customer. Moreover, a research carried out by Bain & Company revealed that a 5% increase in retention rate can increase one’s revenue by between 25% to an astonishing number of 95%. Therefore, it is vital for your company to identify and nurture the most valuable customers interacting with your company. Doing so ensures an increase in profit, which eventually results in a growth in customer lifetime value.