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Customer lifetime value: How online retailers can measure and use CLV

16th Aug 2016
COO CONTENO.tech
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Lifetime value
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Why is customer lifetime value the single KPI to help online marketers and retailers?

Companies today experience the so-called digital denial, meaning that they refuse to accept that marketers are turning into technologists and they have to embrace another approach in acquiring and retaining their customers - based on multiple tools, big data, automation and with delivering communications that are as personalised as possible. 

In ecommerce that is crucial as customers are demanding relevant communication, on-time messages, also being engaged with offers that are only relevant to them. 

How to implement personalisation with the help of customer lifetime value?

Let's go through that matter with a few steps to fully understand the metric and how to manage (and capitalise on) it:

Customer Lifetime Value Explained

Let's start: ACKNOWLEDGE.

Customer lifetime value is a prediction of the net profit of your entire future relationship with a customer.

  • It is often called "the optimisation metric" because it gives you the knowledge on how to allocate your efforts towards the right channels and audiences. Also, to adjust your marketing expenses and profit from the most valuable customers, resulting in better ROI.
     
  • CLV is a holistic metric because it compiles data from different teams. After analysing it, the insights then spread back throughout the whole organisation - marketing, sales, CS, product development.
     
  • It enables the online retailers and marketers to nurture their most profitable customers and do it one-to-one. Yet, scale the business to a truly customer-centric company.
     
  • CLV helps to incorporate retention strategies in the marketing mix. This is important as attracting new customers can cost 5x times as much as keeping an existing one (Lee Resources). Also, increasing customer retention rates by just 5% increase profits by 25% to 95% (Bain & Co.).

    Repeat customers spend 67% more than a new customer (Bain & Co.). And, 20% of your customers generate 80% of the revenue (Pareto).

Then, LEARN.

How to estimate CLV? 

There are multiple formulas, as displayed below. It's advisable to start with a simple calculation to see where you stand with your own CLV. 

You can use this formula (also available in spreadsheets to calculate it right away):

  CLV = CV x T = AOV x F x T

Where AOV (average order value) = total revenue / total number of orders; F (purchase frequency) per customer per year = total orders per customer / unique customers; AOV and F give you the CV (average value of a customer over a period of time); T (customer lifetime) = time (years) before the customer churns.

You can also use free online calculators like:

How To Calculate Customer Lifetime Value?

While calculating your CLV, you should keep in mind the data from all sources and teams. Then, integrate them into one common understanding of where your business stands and project the future growth. Then spread back the insights and adjust the company goals throughout the organisation.

Next is: ACT.

After having the numbers, start optimising the CLV drivers. In a word, the task is to uplift in your business KPIs - retention rates, AOV, repeat purchases, recurring revenue, etc. They all influence the customer lifetime value rates too. 

The higher, the better!

This is how:

  • Segment your customers by behavior and value.

With segmenting by purchases, buying behaviour, acquisition and retention channels, you can get more clear idea of which customers actually drive your business and bring (more) profit.

Knowing that, you can easily adjust your marketing efforts (tools, channels, communication, product mix) and expenses towards those customers that are (literally) most valuable to you.

Customer Lifetime Value - Customer Segmentation

You can see some more segmentation principles here, by Vladimir Dimitroff.

  • Automate your marketing activities toward the most profitable customers.

Customise your communication with your best-performing customers. Integrate on-site pop-ups and mobile push notifications that are triggered by different customer actions. For example:

✔  When a customer tries to leave your homepage just a few seconds after landing on it. 
✔  When a product is added to a wish-list.
✔  When a product is added to a cart but there is no purchase afterwords.
✔  When a customer considers buying a complementary product. Why don’t you come up with a 10% pop-up right at this moment?

Include automatic transactional emails in your retention and activation strategy:

✔  When a customer leaves a product in the shopping cart, you can send him one recovery email with a reminder of the intent to buy. Or, you can schedule a sequence of emails: a first reminder, then add a small discount. Finally, remarket with a bigger, but time-limited discount.

The Cart Recovery Series of three emails result in 131% more orders than a single email. 

✔  Inform the customer when a product that was added to the wish-list but ran out of stock is available again.
✔  Offer personalised sets of products, based on purchase history and browsing behavior. For example, you can plan an email campaign for your top 10% spenders that haven’t purchased anything for 90 days now and email them a few products that match their taste and add a discount.

Customer Journey Stages and Email Campaigns

Source

  • Personalise your website interaction throughout the whole customer journey.

✔  Try out customised product listing. In this way, every customer sees products that are only relevant to him.
✔  Include similar product suggestion widget. It is good for it to be available on the home page, category page, and product and cart pages.
✔  Try cross-selling and also add complementary product suggestions. It is very important that they are relevant both to the customer needs and also to the buying history. Display only matching sizes, brands, and colors.
✔  You can stress on the best performing items (the most viewed or the most purchased ones). It could work very well for you if they are displayed on the home page as an inspiration for the customer to keep on browsing.

Product Recommendation Widget At Homepage

Source

✔  Have you also considered offering different bundles of products? You could do that at checkout for example and up-sell with a nice package of items on a discount prize.

You are to buy a duvet cover. Do you want to make a nice pair and include this pillow case with 10% off in your cart?”

  • Run dynamic remarketing campaigns.

It is a technology of engaging with your past visitors by displaying them products they have visited on your website or suggest similar ones that might match their taste. These types of ads are dynamically created based on user cookies and are visible on websites that the customer visits after leaving your website. Set-up tips.

Dynamic Remarketing Example

Source

  • Include loyalty programmes and different subscription models.

These tools depend very much on your product category and customer needs. Here are a few loyalty program best practices of Lowe’s, Nordstrom, Bebe, Gilt and more. 

Gilt’s Loyalty Program

Finally, you have to: MEASURE.

These are resources to will help you set up CLV tracking in Google Analytics:

Find more growth through identifying and building the business around the valuable customers.”

Peter Fader

Customer lifetime value (CLV) empowers online retailers and marketers to build their business strategy around the most valuable customers. Also, to allocate marketing expenses and organisational efforts in a way to benefit the same (most profitable) group. They buy more; purchase more often and tend to be loyal and refer to the brand.

Great as it may sound, only 5% of online businesses actually measure and use CLV.

Can we spread the word?

P.S. This research was originally inspired by this article at Smart Insights. 

Replies (6)

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Silviya Dineva - COO at CONTENTO.tech
By Silviya Dineva
16th Aug 2016 12:04

Please, leave any comment here. I'll be happy to discuss. J

Thanks (2)
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By Blessed25
17th Aug 2016 09:21

Silviya thanks for the post there's so much detail. Plenty of points that I can defo take away and work with the marketing team on.
Quick point that would be good to get some clarification on - you say 'Automate your marketing activities toward the most profitable customers' and then point towards things like people leaving your homepage, cart abandon etc. But surely these are actions of the less profitable customer? Shouldn't the aim be to actually focus automation on those less proftiable customers, given the relatively low effort required and the potential opportunity to turn them into more regular users? I got a bit confused by this point.

Thanks (2)
Replying to Blessed25:
Silviya Dineva - COO at CONTENTO.tech
By Silviya Dineva
17th Aug 2016 12:33

Wow, thank you for going into detail and sharing such a great question. The thing is that marketing automation technically makes it similarly easy to targeted all segments. The thing is when you try to optimize your KPIs (ROI per marketing activity for example) and also efforts it makes more sense to reach out to those that in the long run would bring more money into the business (that info we have from the CLV calculations).
Here is a bit more how to set up that automation once as to make sense for any stage / behavior or value of each and every customer, if you'd like to take a look --> perpetto.com/email-automation-crash-course

Thanks (1)
Replying to Silviya Dineva:
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By Blessed25
18th Aug 2016 08:59

Thanks Silviya. This all makes sense. As someone with a sales background I guess it's tough admitting that some customers will never be as profitable as others!

Thanks (0)
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By houstonone
17th Aug 2016 10:49

Well done for a very comprehensive article Silviya. A question that springs to mind.........Who would you expect to take ownership of the measurement of clv and would this same person be responsible for driving actions from the metric? Thankyou.

Thanks (2)
Replying to houstonone:
Silviya Dineva - COO at CONTENTO.tech
By Silviya Dineva
17th Aug 2016 12:48

Thank you for your comment. I believe it strongly depends on the organizational resources and company size - it might be relevant that there is one person to strategize based on different business data and then assign any action plan. The good thing with automation is that once you've set up your data and calculations, it takes a few clicks to start with different (re)marketing campaigns. Then it's easy as you can only overview and adjust. People move automatically within segments and emails are triggered also automatically.
If enterprise-size, it is usually that there are more complex software infrastructure and BI to extract data and display insights. Then there are dedicated teams to run any strategy, assigned by Heads.
I hope it helps.
Also in chapter 1 in this eBook there are a few articles that may also give some ideas --> perpetto.com/customer-lifetime-value-ecommerce
Thank you.

Thanks (1)