Customer lifetime value calculations become much easier when you break them down into digestible chunks, and explain each step along the way. We will start with how to get the variables you need and then move to the individual components of the calculation.
All calculations can be done using weeks or months just be sure to adjust the equations to reflect the time period you are working with.
Variables You Need
1. Average Order Value (AOV)
Average Order Value (AOV) = Total Revenue (365 Days) / Number of Orders (365 Days)
Average order value (AOV) gives you the average of how much is spent on your site with each new order made. This metric is actually very important on it’s own as it can help you decide on whether you should be trying to increase your order frequency or increase your average order value.
2. Purchase Frequency (f)
Purchase Frequency (f) = Number of Orders (365 Days) / Number of Unique Customers (365 Days)
Purchase frequency (f) will tell you how many times a customer will purchase from your store in a given time period. For our simplified ecommerce CLV calculation, we’re going to look at everything from an annual perspective. This means that if you take the number of orders in the past year and divide that by the amount of unique customers that made an order in the past year, you’ll get the amount of times the average customer purchases from your site within a 1 year span.
This metric is very important as it tells you how frequently your customers are making purchases from your site and whether or not they’re returning. Increasing your purchase frequency is quite a great growth strategy and can be done quite effectively through a few easy tactics.
3. Customer Value (CV)
Customer Value (CV) = Average Order Value (AOV) x Purchase Frequency (f)
Customer Value is the value of a customer’s average order multiplied by their purchase frequency. This will give you the value of a customer during the time frame you used to calculate average order value (AOV) and purchase frequency (f), which for us was 1 year.
4. Customer’s Average Lifespan (t)
A customer’s average lifespan or (t) is the average time a customer remains active before they drop off and go “dormant”. Meaning that if the time between a customer’s first and last purchase is 365 days, then (t) would be equal to 365.
Store's Average Lifespan (t) = 1 to 3 years
Shopify and analytics guru Avinash Kaushik have determined 1-3 years to be a reasonable timespan for which customers remain active. For stores who know their customers have a limited attention span, such as certain hobby niches like trading card games or brain teaser puzzles, a shorter span like 1 or 2 years may be appropriate. For a clothing brand that continues to pump out fresh and new designs for years to come, your customers will most likely stay loyal for longer and continue to represent the brand for closer to 3 years.
The Customer Lifetime Value Formula
Now that we have the variables we need, we can look at how to discover the lifetime value of each customer! Here is the simplest way to calculate your store’s CLV:
Customer Lifetime Value (CLV) = Customer Value (CV) x Store's Average Lifespan (t)
By multiplying your customers annual value by how long the customers actually remain active, you get an accurate number for how valuable each customer is over their whole lifespan of being your customer. This number is incredibly valuable for you as it will tell you how much you should be looking to expense to acquire each new customer, and how much you should pay to keep them on as a loyal follower.
Customer Lifetime Value Calculation Variants
The simple equation displayed above is well, simple. It ignores a few things that are very important, such as your store’s margin and customer variance.
1. Customer Lifetime Value Including Margin
Customer Lifetime Value with Margin (CLV) = Average Order Value (AOV) x Purchase Frequency (f) x Margin (m)
A customer lifetime value calculation becomes a lot more meaningful when you look at the margin you are going to see over the course of the shopper’s life. You might want to know the actual profit you will gain from each new customer, not just the revenue. This calculation factors in margin to order to determine the profit you will see from a customer.
2. Customer Lifetime Value by Segment
Applying CLV to different segments allows you to see how profitable different types of customers are to your store. This allows you to see where you should be focusing your marketing efforts.
How you could segment:
a. Channels: Run a CLV formula on customers who were acquired from different channels. This allows you to see which channel is giving you the most value. You can then allocate more marketing budget or time to these more profitable channels.
b. Location: A CLV analysis on customer location can reveal areas that are more profitable to your store. Say you discover that shoppers from Canada have a much higher CLV. You can then adjust your marketing to target more of these customers.
c. Actions: Take a look to see how certain customer actions are impacting CLV. Are customers who are registered for your loyalty program generating more value? How much more is a registered account worth over its life? These are questions you can answer when you segment by actions.
The Bottom Line
Even using a basic calculation for CLV puts you miles ahead of most merchants. Being aware of your CLV allows you to make smart marketing decisions that drive long term success!
Read more: The Metrics to Measure Customer Loyalty Online
Read more: How Often Should You Calculate Your Metrics ?
Read more: The Metrics to Measure Customer Loyalty Online
Read more: How Often Should You Calculate Your Metrics ?
Edited by: 浪子
Bibliography
Alex Mceachern. (2017). The Easy Way to Calculate Customer Lifetime Value. Retrieved from
https://blog.smile.io/easy-way-to-calculate-and-increase-customer-lifetime-value
How to Calculate Customer Lifetime Value ?
Reviewed by 浪子
on
December 05, 2018
Rating:
Reviewed by 浪子
on
December 05, 2018
Rating:
