Customer Lifetime Value generally represents the customer’s value to the company over a long time. You may calculate the Customer Lifetime Value unit for the company with its formula. There’re many other ways of calculating CLV, which you can find on this website and will give you deeper insights and focus on an individual customer.
Today, on this website, we check out the importance of the Customer Lifetime Value or CLV, and actionable ways that you may use this to improve the business. If you want more background on its metrics and ways to calculate, I suggest this post will be a great help to you.
Why Is CLV Important?
Customer Lifetime Value is at the heart of stable eCommerce businesses, which will grow organically & sustainably. It is because Customer Lifetime Value is long-term and repeating benefits of the improved ROI & unit economics. It’s a different strategy than to go for short-term sales. The problem is the acquisition-based success needs continuous marketing spending & you just grow depending upon how much you can spend – just think of the Facebook ads & Google Adwords.
A faster way to extra revenue through retention
Suppose you are looking at the CLV as one of the ways of justifying spending high on the acquisition, probably you are focusing on the wrong side of the equation. In reality, the best method to maximize the customer lifetime value will be investing in retention.
Think of it: For each 1% of the shoppers who return over to the eCommerce website after the first visit, the revenue increases by around 10%. Thus, in case you retain around 10% more of the current customers, the revenue doubles effectively. Here is another way to look: Reducing the churn rate by around 5% improves your revenue from 25 – 125%. Oh, wonders investing in the CLTV-focused strategy will do!
Impacts its bottom line
The total CLV impacts the profitability. Suppose you work only for the conversions, then relying on the new customers, which wants you to pay the cost of the acquisition each time, getting the smaller margin from every sale. Thus, optimizing for the CLV means getting repeat orders from your customers that you have acquired so you do not have to pay for it again. You will get full profit of all your orders after their first one, and making up the CAC that you have paid initially. Therefore, your ROI improves.
CLV enables you to segment the customers based on value
You may narrow down your focus: you can send the special offer and gift to “VIP” customers to ensure you will retain them, and focus on getting new customers with the same backgrounds by using look-alike modeling. Also, you may start upselling to less valuable customers slowly to improve their CLV. Such segmentation will allow for a personalized experience and something lots of customers expect.
If you are selling replaceable and consumable products, then integrating replenishment campaigns in the marketing strategy will improve your CLTV.