Customer Lifetime Value (LTV) refers to the total amount of revenue that a customer will generate for a business during their entire relationship with that business. Obviously, the longer a customer's lifespan is with you and the more he spends on your online store, the higher his/her LTV. This is an important metric that provides you insights into your estimated revenue, high-valued customers, and your financial viability. It is less expensive for your business to keep the existing customers than to acquire new ones. Let’s deep dive into this metric and talk about how we can improve your LTV.
Why customer lifetime value matters to e-commerce stores
LTV is particularly important for ecommerce stores because it can help businesses make more strategic decisions about how to allocate resources—by identifying the true value of a customer to the business. For example, if an ecommerce business knows that their LTV is high, they may be willing to invest more in marketing campaigns to attract new customers. Conversely, if their LTV is low, they may need to focus more on customer retention efforts to ensure that existing customers remain loyal and continue to make purchases. Whether you like the outcome of your LTV analysis or not, you can make informed decisions about your customer acquisition strategy by identifying the value of individual customers.
Furthermore, LTV can help ecommerce businesses to better understand the value of different customer segments. For example, if a business sees that their LTV is particularly high for customers who purchase a certain type of product, they may want to focus their marketing efforts on that product category to attract more customers who are likely to have a high LTV.
How LTV drives business decisions for your online store.
Customer lifetime value is an important factor in determining the direction that your business is headed. It is also a core metrics driving your long-term strategy. It helps you understand which products to sell, which campaigns to run, and how to budget for customer acquisition.
- Product and Category Development: By understanding their LTV, ecommerce businesses can better understand what types of products their customers are most interested in, and can use that information to inform their product development efforts. For example, if an ecommerce business sees that their customers have a high LTV for a particular type of product, they may want to invest more in developing new products in that category to continue to appeal to that customer segment.
- Marketing Campaigns: LTV can also help businesses to make more informed decisions about how to allocate marketing resources. For example, if an ecommerce business knows that their LTV is particularly high for customers who come to their website through a certain marketing channel, they may want to invest more heavily in that channel to attract more customers who are likely to have a high LTV.
- Customer Acquisition: Finally, LTV can also impact how much ecommerce businesses are willing to spend to acquire new customers. By knowing their LTV, businesses can calculate how much they can afford to spend on customer acquisition while still achieving a positive return on investment. For example, if an ecommerce business knows that their LTV is $100, they may be willing to spend up to $50 to acquire a new customer, knowing that they will likely earn that money back over time through repeat purchases. It is essential to manage the balance of customer acquisition costs and LTV—we talk more about it here.
How to calculate LTV for your Shopify store.
Calculating LTV requires a combination of historical sales data and assumptions about customer behavior over time. The basic formula for calculating LTV is as follows:
LTV = (Average Order Value) x (Average Purchase Frequency) x (Average Customer Lifespan)
- Average Order Value refers to the average value customer spends. This can be calculated by dividing the total revenue generated by a customer by the number of orders they have made.
- Average Purchase Frequency = Total Orders / Total Customers
- Average Customer Lifespan refers to the length of time that a customer remains active and engaged with the business. This can be calculated by tracking the time between a customer’s first purchase and their last purchase, or by estimating the average customer lifespan based on historical data.
Time for a shameless plug: Airboxr automatically calculates your LTV and shows you the number right on your home page. It even works if you are a new store with at least 6 months of sales. Learn more about how we calculate LTV here.
Issues with calculating Shopify LTV for Shopify stores (or, what's your average customer lifespan?)
While LTV is a critical metric for e-commerce businesses, calculating it can be challenging for newer stores that may not have a lot of historical sales data. Specifically, if you run a new store, you are likely to run into these issues:
- Limited Customer Data: You may not have enough customer data to accurately estimate key metrics like average purchase value or customer lifespan.
- Changing Business Models: You may be experimenting with different business models or product offerings, which can make it difficult to accurately estimate LTV.
- Limited Resources: You simply may not have the resources to invest in sophisticated data analysis tools, which can make it difficult to accurately calculate LTV.
If you are an Airboxr user, you need not worry about the above limitations. Airboxr will connect to your customer purchase data on Shopify and calculate the LTV for you without any manual effort.
Airboxr uses a unique methodology to determine your LTV even if your store has not been around for year. Learn how we calculate LTV.
How can Shopify stores increase LTV
Increasing LTV is a key goal for ecommerce businesses, as it can help to improve profitability, drive growth, and build a loyal customer base over time. While anything that increases repeat purchases of profitable products can have a positive impact on LTV, the three tactics below are are a good starting point.
Personalization is a powerful tool for increasing average order value (and hence LTV), as it allows businesses to tailor their marketing messages and product recommendations to the specific needs and interests of each customer. By using customer data to personalize product recommendations, email campaigns, and other marketing messages, ecommerce businesses can increase the likelihood that customers will make repeat purchases and remain engaged with the business over time.
Amazon is an expert in personalization, utilizing customer browsing and purchase history data to provide recommendations on products that will likely interest them. The company's tailored email campaigns and personalized product recommendations have enabled it to generate high levels of repeat business and establish a loyal customer base over the years.
Amazon customizes the experience right from its home page.
Loyalty programs are another effective tool for increasing LTV, as they incentivize customers to make repeat purchases and engage more deeply with the business over time. By offering rewards like exclusive discounts, early access to sales, and free shipping, ecommerce businesses can encourage customers to make more frequent and higher-value purchases, while also building a sense of community and loyalty around their brand.
Sephora’s Beauty Insider program is a great example of a successful loyalty program that builds long-term customer relationships. By offering rewards like exclusive access to new products, free samples, and discounts on future purchases, Sephora has been able to build a highly engaged and loyal customer base, driving significant repeat business and increasing LTV over time.
Sephora provides multiple levels of benefits for its loyal customers.
Upselling and cross-selling are powerful techniques for increasing LTV, as they encourage customers to purchase additional products or upgrade to higher-value options. By offering personalized product recommendations and bundling related products together, ecommerce businesses can increase the average value of each purchase, driving higher revenue and improving profitability over time.
Best Buy’s Geek Squad service is a great example of upselling in action. By offering customers the option to purchase technical support services and extended warranties, Best Buy has been able to significantly increase the average value of each purchase, driving higher revenue and improving LTV over time.
Best Buy upsells technical support services to existing customers, paving the way for further interaction and conversions.
Retargeting is another effective tool for increasing LTV, as it allows businesses to target customers who have already expressed interest in their products or services...and increasing their purchase frequency. By serving personalized ads to customers who have visited their website or added items to their shopping cart, ecommerce businesses can encourage customers to complete their purchases and remain engaged with the business over time. Retargeting ads are often cheaper than ads targeted at fresh potential customers. This can enable your store to reduce acquisition costs over time.
Warby Parker’s retargeting campaign is a great example of how businesses can use personalized ads to increase purchase frequency and LTV of the average customer. By serving targeted ads to customers who have previously visited their website or browsed their products, Warby Parker has been able to increase the likelihood of customers making a repeat purchase, while also building brand awareness and driving new customer acquisition over time. Hot tip: make sure to target your remarketing campaigns only to regions you can deliver to.
It took all of 15 seconds for Warby Parker to retarget me on external websites.
Overall, increasing LTV is a critical goal for ecommerce businesses that want to drive growth and build a loyal customer base over time. By using strategies like personalization, loyalty programs, upselling and cross-selling, and retargeting, businesses can improve profitability, drive higher revenue, and build a sustainable business model over time.
Are you on top of your business metrics? Do you know who your most valuable customers are? Do you know which products are driving your profitability? Start a free trial with Airboxr and find all the numbers you need to build a sustainable business.