Measuring and Increasing Customer Lifetime Value in E-Commerce

In e-commerce, merchants have a multitude of options to implement optimisation measures in the online shop. Some are suitable for short-term use, while others ensure greater customer profitability in the long term. The customer lifetime value is a key figure that helps to measure the efficiency of one’s own marketing measures and to sustainably increase them on the basis of the evaluations. In times of customer experience and customer journey, it is increasingly important to know how customers can really be retained and what optimal customer care looks like. This is the only way to make profitable marketing budgeting that ensures success in the long term.

What is the Customer Lifetime Value?

Customer lifetime value (CLV for short) is a key figure that is mainly used in business administration and marketing. In a nutshell, it indicates the value of a customer for the company over a certain period of time and is made up of the current as well as the potential or expected customer value. For this purpose, a formula is used, which we list below. In reality, the result reflects the average contribution margin that a buyer has for the company during its entire customer lifetime. This makes it possible to focus specifically on sustainable customer relationships, good customer care and long-term customer loyalty.

Importance of Customer Lifetime Value

Customer acquisition brings companies the growth they need and is an important part of any marketing strategy. In the process, it quickly recedes into the background that the costs of customer acquisition can turn out to be significantly higher than assumed. This only becomes clear when a holistic view is taken. Often it is only when this is done that it becomes clear that the expected income from a new customer over the “customer’s life” far exceeds the expenditure.

It is therefore worthwhile to determine the customer value in order to gain clarity about how the value of a customer relationship will be shaped and how this can be increased in the long term. With customer lifetime value, online retailers and companies are able to use budget and resources profitably. For example, measures can be tailored more individually to buyers.

How to calculate Customer Lifetime Value

There are various formulas for determining customer value. The simplest and most practical is the following via the net present value method:

Here, the expected duration of the customer relationship (T) is compared to the expected turnover (eT) and expenditure (aT) for each period (t) and the entire customer cycle is included with the calculation interest rate (i). In other formulas, socio-demographic factors such as income or information values of customers are included.

Benefits of Customer Lifetime Value

Once the key figure is recorded, direct conclusions can be drawn regarding marketing budgeting. Depending on the result, companies and online retailers can increase or reduce investments in customers. If the CLV is high, it is worth investing in customer loyalty and customer care. If, on the other hand, the value is low, tied-up resources can be withdrawn and invested in profitable customers.

How to increase Customer Lifetime Value: 5 essential Tips

If you consistently keep an eye on the customer lifetime value, you can use targeted measures that can increase the customer value. In the following, we have compiled 5 tips on how to do this.

Promote up-selling and cross-selling

The customer puts a product in the shopping cart and is given the opportunity to purchase a higher-quality product within an up-sell. With cross-selling, the customer gets offered additional products that complement his purchase.

Increase purchase frequency

The goal of efficient customer loyalty and care is to encourage a regular customer to buy more often. This also increases the Customer Lifetime Value by as much as 50% on average. With abandoned cart emails, it is possible to bring the abandoned customer back into the purchase process after a shopping basket has been abandoned and thus increase the purchase frequency.

Offer discounts

Discounts, promotions and special offers are usually particularly effective in increasing the order value. However, the discounts should be chosen in such a way that premium coverage can still be achieved. Our technology therefore only offers individual discounts to those purchase abandoners who actually leave the shopping basket for price-sensitive reasons. Discount measures are particularly suitable for a short-term and quick increase in customer value. Learn how to use vouchers risk-free and profitably.

Offer free shipping

Around 59% of online shoppers abandon their order because the shipping costs are too high. Online shops that offer free shipping or link it to a minimum order value increase the likelihood that the purchase will actually be completed, thereby increasing the CLV. Regular promotional offers or a monthly flat rate, which then makes free shipping possible, are also useful in this context.

Guaranteed return policy

Customer value in e-commerce can also be increased by the right of return. If customers know that they can return goods free of charge in an emergency, this not only increases the likelihood of a purchase being made, but often also the shopping cart value. The right of return creates security and trust.

There are a few more interesting measures that increase customer value in the long term. Another alternative is to increase CLV by winning back customers, which is shown to be much cheaper than acquiring new customers. Likewise, extending customer lifetime offers an attractive option. We highlight both options in our free CLV Toolkit.

Every online shop should know its true Customer Lifetime Value

The Customer Lifetime Value is the right key figure for the questions with which customer an investment is worthwhile at all and where unused sales potentials lie. It provides information on how a marketing budget should be distributed, which prevents. The biggest advantage: with the calculation of the customer lifetime value, both sales from the past and forecasting sales expectations are used, which allows a holistic view. Get started with Customer Lifetime Value and get our free CLV Toolkit.