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What is Customer Lifetime Value in Ecommerce, and Why is it so Important?

When running an eCommerce store, you’ll have a range of metrics at your disposal. From cost per lead and conversion rate to average order value and checkout abandonment rate – there are a lot of numbers that keep your business on track.

Yet, there is one metric that marketing experts constantly overlook.

The importance of customer lifetime value in eCommerce is almost always underestimated. In fact, when asked, roughly 66% of marketers were ‘unaware of the term and its connotations.’ If you’re one of that 66%, then this guide is for you.

We’ll walk through exactly what customer lifetime value is, as well as exploring how we can use it to boost our sales over time, create a host of satisfied customers, and make intelligent a/b testing scenarios.

What is Customer Lifetime Value?

Customer lifetime value, also known as LTV, is a metric that describes the total value of a customer on your site based on their sales over time. It takes into account every single sale a user makes on your site, from their very first purchase, right up to their most recent buy.

Customer lifetime value is also intrinsically linked with customer satisfaction. Simply put, if a customer is willing to return to your store and make repeat purchases, then it’s likely that you have a satisfied customer and a loyal user base.

If you’re attempting to measure customer satisfaction, LTV is one of the critical data points you should look out for.

How does LTV impact revenue?

As customer lifetime value increases, the average amount each customer spends will also increase. Due to this, a high LTV will signal a boost in revenue as your customers are buying more products over time.

What’s excellent about return customers is that you don’t have to spend money to obtain them. After their first time on your site, they already know your brand and are familiar with your products. Instead of finding your business through a marketing campaign, they’ll simply head straight to your website to make a purchase.

An existing customer is also far more likely to buy additional products than a new customer. It is estimated that a business will have 60-70% more success selling to an existing customer rather than a new one.

When it comes to customers, retention trumps acquisition every single time. That’s why a high customer lifetime value is an excellent indicator of an eCommerce business with increased revenue.

With a high LTV, you’ll also be getting:

  • Higher repeat customer rates
  • Lower fees for marketing campaigns
  • More revenue

How does customer lifetime value relate to customer acquisition cost in eCommerce?

Another essential metric to understand when running a business is your CAC, or customer acquisition cost. This value is the total cost of acquiring a new customer, taking into account marketing, special first-time discounts, and advertising fees.

Without a strong knowledge of your average CLV, you can’t gauge if your CAC is too high. For example, if a customer costs $100 to acquire, but you didn’t know your CLV, you would be left in the dark about how much that customer will make you.

When you factor in a customer lifetime value of $750, suddenly that CAC $100 doesn’t seem quite so bad.

Monitoring these two metrics side by side will also alert you to when you need to make a marketing change. If your CAC is starting to outweigh the LTV of a customer, your business is in danger of losing money.

The benchmark ratio for LTV:CAC should be 3:1. That means every customer you obtain should spend three times as much as what it cost you to find them. As the CAC declines with repeat customers, LTV will rise, making this ratio fall even further in your favor.

How do you use LTV to supercharge your marketing efforts?

Knowing a customer LTV is fantastic, but applying it to your marketing strategies is even better. By integrating the LTV metric into your digital marketing campaigns, you’ll be able to run A/B testing and see which changes could lead to more revenue in your business.

Let’s take the example that your product is a monthly subscription service. You offer either one-month, six-month, or annual subscriptions.

Next, we run some testing and discover that when we remove the six-month option, LTV increases as more customers decide to opt for 12-months over 1-month. Due to this change in LTV in the customers we’ve tested, we can see that a clear next step would be to remove the 6-month subscription option for all customers.

This would ensure more customers subscribe for 12-months, boosting your LTV and increasing the average order value of each customer.

By taking into account customer behavior, psychological profiles like the type of buyer, and which products a customer is interacting with, Verfacto will be able to estimate the LTV of a customer ahead of time. This can save you time when running tests and optimizing your store.

Verfacto offers a hassle-free way to monitor and optimize your customer LTV. With a free one-month free trial, you could get started today!

What are two easy ways I can improve my customer lifetime value?

Boosting your LTV should be one of your primary goals as an eCommerce store. Let’s take a look at two methods for increasing customer LTV that you can start today.

  1. Create a Loyalty Program – Customers who return again and again will cut down on your marketing costs (CAC) and boost your LTV. Although it may seem counterproductive to offer slight discounts to repeat customers, the amount of money you’ll be saving will far outweigh this expenditure.
  2. Take Advantage of Cross-Selling – Using Verfacto’s cross-pairing suggestions, you’ll be able to see which items in your store are regularly bought together. By bundling products together with cross-selling, you’ll be able to increase your average order value and boost LTV.

That’s just the beginning! We’ve written a whole article detailing ways you can improve your customer lifetime value over time.

Final Thoughts

Although often overlooked, LTV is one of the most vital metrics to track when running an eCommerce store.

If you’re looking for an easy method of managing your LTV, then take advantage of the 1-month free Verfacto trial. Verfacto provides an easy way of monitoring, predicting, and improving your LTV, making the process of boosting your sales and creating satisfied customers as easy as possible.