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What is Life Time Value of Customer and Why it Matters the Most

What is Life Time Value of Customer and why it matters the Most

You may or may not be a part of any company or ecommerce business but you must be aware of the fact that ecommerce business is booming these days. The number of ecommerce websites is growing at an accelerated rate.

It will hardly consume a few second of yours to list down a few popular websites. The reason behind is that we live under the camouflage of big hoardings and exciting advertisements. This loud and noisy advertisement environment is a result of a thoughtful strategy.

The ultimate goal is to attract our attention and to create a sphere of perception that such and such particular company is doing great, is profitable and accountable in the market. But is it so easy for a company to last an impression?

Current Scenario

Every newbie in the industry takes a very strategic start to make the new beginning a success. All the agendas evolve around the motive of getting accommodated in the current market and suffice the customer needs.

Great eCommerce website design company is hired to create the most appealing websites. Marketing strategies like content marketing & social media marketing are tried by hiring the professional SEO services

Overall an excellent marketing, production and sales team are hired. These companies have everything from funding to resources to succeed, yet why is it that many startups and businesses fail? Or what is the reason behind few companies to make distinguishable profits.

Need of Customer Lifetime Value

    The think tanks have been brainstorming for a long to find the reason behind failure in spite of presence of every business element. There has to be some responsible factor other than sale, marketing, investment and revenue. Different case studies and statistics analysis gave us the answer as Customer Lifetime Value.

  • Ignorance of future growth
  • The companies are worried about their sales figures and revenues but the expected concern over the future growth is over looked. It may or may not be an act of ignorance as the industry is not yet very familiar with the concept and importance of customer lifetime value.

    The ecommerce websites have been hungry to acquire new customers and throw all their man power in this particular direction without acknowledging the fact that a current customer may bring more business than new one. CLV revolves around this fact.

What is Customer Lifetime Value (CLV)?

    Let’s first get accustomed with the concept of CLV. CLV is a parameter that defines the worth of every customer. And the good news is that you can calculate it. It is the net profit that the association in future with any customer will bring to your company.

    Focusing on net profit, understanding the meaning here is important. It is different than revenue. Suppose two different customers purchase same items from your website. The first one purchases instantly but the second customer commits some mistakes, calls customer support, takes help and then does the purchase.

    In both the cases, revenue is same but net profit is more with the first customer, as he uses least of your resources. So, he has the higher CLV.

  • Simplified example
  • In simplest terms, if two customers make purchases within a week, than the one purchasing costlier product has higher CLV. Or let’s say if these two customers purchase items of same worth within a week, than the one purchasing more frequently will have higher CLV.

    Customer Lifetime value as the name suggests is the calculation of your net profits that the lifetime association of any customer will bring around. Life time association is actually the period of active association or entire duration of the website membership of the customer.

    It not only talks about the customer value but also can be considered a powerful business valuation determinant.

Why is CLV important?

    CLV is considered a very powerful factor in determining the business growth. Since it can be calculated, most companies use the analytics to calculate it in advance and inculcate the results in all the major decisions.

    Knowledge of customer groups with higher CLV results in better marketing, budgeting, resource planning, production and sales.

  • Marketing and support

  • Marketing and support

    Let’s take a look in a detail. The marketing budget includes the special mention of monetary investments to be made for continuing association and acquisition of the higher CLV customers.

    Customer retention becomes a prominent agenda resulting in separate customer support strategies to keep the existing customer interested and glued.

  • Sales and Production
  • The overall result shoots up the sales figures. The interest and feedback of these customers is taken into account while production. The new product line is designed with the keenness to attract higher CLV members.

    Opening of new stores and range of collection is even impacted by the interest of CLV customers. Many a times this advance planning and budgeting is simply enough to garner targeted sales figures without extra expenditure of enormous marketing propaganda.

    The use of CLV data has been a proven fact today and many online and ecommerce companies like Amazon and Netflix have been benefitted with it.

  • Impact on Amazon
  • Giants like Amazon sensed the urgency of CLV analysis. They launched prime membership. A quick analysis displayed that prime members spend more than the average customers.

    Business insider states that today, Amazon has acquired approximately 58 million prime members which accounts to 22% of the total customers.

    Amazon has been consistently improving the prime experience for this section of higher CLV customers. The practice of satisfying the existing customer has amazingly worked for them.

    Roy H. Williams stated “The first step in exceeding your customers’ expectations is to know those expectations.”

  • Netflix expansion
  • Netflix calculated that the association with any subscriber is for 25 months and $291.25 is the estimated lifetime value of any customer.

    Netflix decides the marketing budget on acquiring customers based on this data. The planned expenditure helped Netflix to expand and become a huge name.

  • Starbucks CLV strategy
  • LTV is a mandate for every type of business. The On ground businesses do not benefit as much as online ones as their customer walks-in through doors and this gives no surety of regular visits.

    Though its impact is considered less for shops and retails stores, stores like Starbucks have created a business plan directed from CLV

    Business insider quotes that Starbucks calculated the average LTV which is $14,099. An increment of efforts and investment of mere 5% towards customer retention resulted in enhancing the profit by 25% to 95%. Analytics and calculations suggested that acquiring new customers demanded 6-7 times more investment.

  • Benefits of customer retention
  • Several case studies have been done with many successful ecommerce giants. All the results indicate towards the benefits of customer retention than customer acquisition. This makes LTV even more important.

    The probability of upcoming purchases from an existing active customer is more than any new customer that can be acquired. The industry does not generally focus on retention of existing customers in spite of the fact that it requires lesser input.

    The likes, dislikes and shopping fashion of the existing customers are an open book and any one can take advantage from it. Many a times, better customer service is all you need to create a strong bond with higher CLV customers.

Customer Lifetime Value Calculation

    Calculating CLV can be simple but a time taking process. RFM Analysis technique is the simplest and stepping stone of calculating CLV where, R stands for Recency, F for Frequency and M for Monetary value.

  • RFC in detail
  • Recency talks about the period of latest purchase made by the customer. A customer who made purchase recently is taken in account rather than the one who has been dormant for some time. It is considered that next or frequent purchases can be made by those customers who made a purchase recently.

    Frequency talks about the no. of purchases by the customer in a time period or the frequency of purchase. The customer with more frequent purchase is expected to make the next purchase when compared to customers who haven’t shopped anything form the website in a while.

    Monetary value is the total money spent by the customer on the purchases in a particular time frame. Customer going ahead with purchase of costlier product is supposed to come back and purchase again.

  • Customer segmentation

  • Customer segmentation

    On the basis of these three factors, customers are segregated and segmented to arrive at the customer group with highest CLV. Firstly, make a list of all the customers in a particular time period. Let’s take this time period as one year.

    Now make three columns for Recency, Frequency and Monetary value against the customer names. Instead of writing particular numbers for all the three factors, assign the numbers from 1, 2 and 3. Here 1 indicates low, 2 indicate medium and 3 is for high. After filling the table, make a total of R, F and M factors for each customer.

    Next, divide all the customers in three categories namely, low, medium and high depending on the number derived on summation. The customer section with the highest summation value falls in the segment of high CLV customers. Similarly, we can derive the Medium CLV customer segment and low CLV customer segment.

  • CLV assessment
  • Next, we can focus on value assessment for each section. We will have to derive three different components. The first is Average order value which can be calculated by dividing the total revenue from the total no. of orders. Second is Purchase frequency for which we divide total no. of orders and customers.

    The third is Customer value which is multiplication of the two above derived results i.e. Average order and Purchase frequency.

    This way, we arrive at the customer value of each segment. For calculating the CLV for any customer all we need to do is find the expected association or life span of the customer and multiply it with the derived customer value.

What Next?

    So, you have actualized and understood the concept of CLV, conceived its importance and finally learnt to calculate the value. What comes next? CLV figures can be helpful prior to budgeting and planning.

    After all these are crucial activities. Also, CLV analysis can be helpful to maintain and enhance the customer retention rate. Upon realizing the actual highest CLV customers, businesses can create campaigns and strategies to lure the existing customers to become frequent buyers.

    In an ideal case, retention of a single customer should be of utter importance for any company. Peter Drucker rightly said “The purpose of business is to create and keep a customer”.

  • Loyalty Benefits
  • Variety of techniques can be employed to retain the higher CLV lot. Loyalty programs and services are ranked on the top. Any buyer will be compelled to make more purchases if there is any hidden benefit on reaching a certain target. These targets can be bonus points, discounts, coupons or online wallet money.

  • Exclusivity
  • Make them feel totally exclusive. Launch early discounts for the members or particular purchase hours where they can be privileged with more discounts and less traffic. This strategy not only benefits ecommerce websites but is also equally beneficial for retail stores. It enhances the customer loyalty and experience.

  • Encourage purchase with information
  • Create strong analyzing team which constantly analyzes the customer choices, shopping patterns and search results. Keep suggesting products to the customers while they are active online. This may increase the chances of purchase. Send them promotional mails and information about your upcoming or available collection.

Conclusion

By calculating and working on Customer Lifetime Value, all the efforts towards money making will no doubt be better rewarded. It also improves the ROI of your company. Entrepreneurs can always expect an upper hand in budgeting in different marketing strategies as the positive results will be kind of assured.

Finding right customers is the stepping stone to create any successful online business, but it is the effort in maintaining it that makes the difference

Discuss with our Magento 2 experts today to find out what we can do for you to get the max revenue out of your existing customers

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