What is Customer Lifetime Value? How to increase CLV for e-commerce?

What is Customer Lifetime Value (CLV)? This is an important indicator that helps businesses evaluate the value that each customer brings during their time with the brand. When developing e-commerce, understanding and optimizing CLV helps businesses not only increase revenue but also build sustainable relationships with customers. In this article, Meowcart will help you better understand CLV and how to effectively increase customer value in e-commerce.

What is Customer Lifetime Value?

Customer Lifetime Value (CLV) is a measure of the financial value that each customer brings to a business throughout their customer life cycle, from the first purchase until they stop interacting with the brand.

CLV is not just about short-term revenue but also includes the long-term benefits that businesses can gain from maintaining relationships with customers.

Understanding CLV helps businesses not only predict future revenue but also build strategies to optimize customer experience, thereby increasing long-term value. A customer with a high CLV is often more loyal, less price-sensitive, and more likely to recommend the brand to others.

How to calculate Customer Lifetime Value

1. Calculate Average Purchase Value (APV)

This is the average value of each order a customer makes. To calculate: APV = Total Revenue / Number of Orders

2. Calculate Average Purchase Frequency Rate (APFR)

This metric shows the average number of times a customer makes a purchase in a given period of time: APFR = Total Orders / Number of Customers

3. Calculate average customer value (Customer Value - CV)

Once you have APV and APFR, you can calculate the average value each customer brings to your business: CV = APV x APFR

4. Calculate the average customer lifetime (ACL)

This is the average length of time a customer continues to shop with a business. Formula: ACL = Total Time Engaged / Number of Customers

5. Calculate CLV

Finally, you can calculate your customer lifetime value based on the above metrics: CLV = CV x ACL

For example:

If an average customer spends 500,000 VND per order, makes 4 purchases per year, and maintains purchases for 3 years, the formula would be:

• APV = 500,000 VND
• APFR = 4 times/year
• ACL = 3 years

Apply to CLV formula: CLV = 500,000 x 4 x 3 = 6,000,000 VND

The total lifetime value of a customer is 6,000,000 VND.

The Role of CLV in E-Commerce Development

In the e-commerce environment, Customer Lifetime Value (CLV) has become an indispensable metric. CLV not only helps businesses measure the profit from each customer throughout their lifetime, but is also a key factor in developing customer retention strategies and optimizing costs.

Reduce Customer Acquisition Cost (CAC):

Acquiring new customers in an online business is often much more expensive than retaining existing customers. According to research, existing customers are 14 times more likely to sell to them than new customers. By increasing CLV, businesses can reduce CAC costs and optimize resources for taking care of existing customers.

Increase revenue from existing customers:

CLV allows businesses to focus on their highest value customers and develop strategies to increase their value. Strategies such as upselling and cross-selling can be implemented to maximize revenue from these customers.

Better understanding of customer behavior:

CLV helps online businesses segment and better understand the behavior of each customer group. For example, by analyzing customer lifetime value by segment, businesses can identify loyal customers and offer special promotions to retain them. This is especially important in online businesses, where fierce competition requires businesses to continuously create value for customers to keep them coming back.

Optimize customer experience and increase loyalty:

By understanding the value of each customer, businesses can optimize the user experience, from improving the website interface, customer care services, to personalizing the shopping experience. This not only helps increase CLV but also builds long-term customer loyalty.

Create competitive advantage:

In online business, understanding what Customer lifetime value is helps businesses create a competitive advantage over competitors. When optimizing CLV, businesses are able to invest more heavily in marketing strategies, thereby attracting more potential customers and retaining current customers.

Shopify and CLV: Sustainable Growth Through Website Optimization

In ecommerce, Customer Lifetime Value (CLV) not only measures the profit from each customer but also provides insight into how to retain and increase their value over the long term.

Shopify is one of the leading e-commerce platforms, not only supporting website building but also providing many powerful features to help businesses increase CLV. Below are the main features of Shopify that help businesses increase CLV effectively.

See more: What is Shopify? Advantages and disadvantages of Shopify 2024

See more: Latest Shopify website setup guide 2023 (Video)

Improve user experience (UX)

One of the key factors in increasing CLV is improving the user experience. Shopify offers a variety of tools and features to help businesses create websites that are user-friendly, easy to navigate, and fast to load. When the shopping experience is smooth, customers are more likely to return and make more purchases, increasing CLV.

Personalize the customer experience

Shopify offers a variety of apps and integrations that help businesses collect and analyze customer data to deliver personalized shopping experiences. This feature allows you to display product recommendations based on a customer’s purchase history, preferences, and search behavior. When customers feel that your products and services are relevant to their needs, they are more likely to return to shop again, increasing their CLV.

Integrate loyalty programs

Shopify supports loyalty program apps like Smile.io or LoyaltyLion, which help businesses encourage customers to return to their stores by earning points, receiving offers, or receiving special discounts. Offering rewards to loyal customers not only keeps them coming back, but also increases their purchase frequency, helping to maximize CLV​.

Email marketing automation

One of Shopify’s powerful features is its integrated automated email marketing tools. Businesses can easily send emails reminding customers about favorite products, abandoned carts, or introducing special offers. Automated email marketing helps maintain customer engagement and increases the likelihood of returning to shop, thereby increasing their lifetime value.

Easy and secure payment integration

A key factor in retaining customers and optimizing the shopping experience is a fast and secure checkout process. Shopify offers a variety of payment options to suit different types of customers, from credit cards, e-wallets to international payment options. This enhances the user experience and encourages them to come back again and again, thereby increasing CLV.

Customer behavior analysis

Shopify offers powerful data analytics tools that allow businesses to capture and track customer shopping behavior. Through detailed reports on revenue, conversion rates, and best-selling products, businesses can develop effective marketing strategies, focusing on the highest-value customers, helping to increase customer lifetime value.

Optimized for mobile devices

With the rise of mobile e-commerce, Shopify offers mobile-optimized websites that make it easy for customers to shop on their smartphones or tablets. A mobile-friendly website not only improves the shopping experience but also helps increase e-commerce revenue and CLV.

Conclude

Hopefully, through the above article, Meowcart has helped you answer the question of what is Customer Lifetime Value. CLV not only provides an overview of the value each customer brings, but also helps businesses optimize marketing strategies and increase long-term profits. By focusing on retaining customers and increasing their value, businesses can reduce the cost of attracting new customers and maintain stable growth.

Developing a website on Shopify not only helps businesses sell, but also optimize CLV through features such as personalized experiences, marketing automation, and customer loyalty programs. These powerful tools help improve the shopping experience and increase customer engagement, thereby increasing CLV and profits for businesses.

With Meowcart's professional Shopify website development service, businesses can not only build an optimal e-commerce website but also achieve the goal of maximizing customer value. Contact Meowcart for more advice!