Customer Lifetime Value

Customer lifetime value in ecommerce 101

Customer lifetime value is proving to be one of the most important ecommerce metrics. More and more online brands discover it as an indicator of brand loyalty, stable financials and possibilities for growth. We’ll see why in a bit.

What is customer lifetime value?

Customer lifetime value is the total amount of money someone spends with your brand over the complete period of their customer lifetime. This is from their first purchase ever to the last one before they drop out as a customer and never shop from you again.

In ecommerce, the

customer lifetime value definition

is: the total revenue earned from a single customer.

Customer lifetime value calculation

There is a disagreement on how to calculate customer lifetime value. Some businesses and industries prefer to project it in the future as an estimation – this is the predictive method. It is good if you’re just starting out with your brand and really have no idea how much people will shop from you.

However, for existing businesses there’s no need to guess. An ECRM like Metrilo that accumulates customer data and ecommerce analytics can give you the exact customer lifetime value for each customer, accounting for historical data.

We advise our clients to take these real numbers, adjust them if needed and work with that in their planning because it is based on real data and not guesswork.

Customer lifetime value formula

By our method, in case you can sum up all orders of a customer, that’s it:

CLTV = Order 1 + Order 2 + Order 3 ……

Or if you cannot, just take the average order value (AOV) and the average number of orders you get per customer (n) to calculate:

CLTV = AOV x n

Customer lifetime value example

Customer lifetime value is an important ecommerce metric not a lot of brands focus on. It is long-term oriented and most businesses concentrate on the short term: how much can we sell now.

If you focus on the acquisition of new customers, you will be growing in terms of customer base, but will need more and more marketing spending to keep going like that. Every customer comes at a price (customer acquisition cost, CAC) so to get the true profit you’re earning from them, you need to take the cost out of the revenue:

Profit from customer = Gross Revenue – COGS – Overhead – CAC

So if you only make one sale to a customer, this will repeat every time, eating away your profit margin.

For example, if your AOV is $50, and costs are $15, $2 and $10 respectively:

Profit from customer = $50 – $15 – $2 – $10 = $23

If you decide to increase customer lifetime value, however, things will look more like:

Profit from customer = (2 x $50) – (2 x $15) – (2 x $2) – $10 = $56 with 2 orders where CLTV = $100.

With 3 orders:

Profit from customer = (3 x $50) – (3 x $15) – (3 x $2) – $10 = $89 where CLTV = $150 and so on.

Of course, this is a rough calculation and your unit economics may work very differently, but the idea is you get a better and better return on the $10 CAC invested at the beginning with each new order from an old customer. The higher the customer lifetime value, the better profitability you achieve because you don’t need to bleed more marketing money. Your retention rate matters.

Related: Why CLTV matters?

Our recommendation: Make customer lifetime value a priority and work to maximize it.

DTC-brands-retention-report

Our recent report on customer retention  in DTC brands found that the average customer lifetime value across product categories is $168, ranging from $55 (tea) to $477 (CBD oil). Using a benchmark is a good starting point. The report also looks at the best tactics used for driving repeat sales so feel free to steal some.

 

About the author

With experience in FMCG and marketing, Dimira writes to help the brands of tomorrow succeed and believes passion is a key ingredient in any business.

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