How to optimize Customer Lifetime Value in your e-commerce?

The basis of the store's marketing activity is the acquisition of new customers. However, while the influx of new users allows e-comms to develop and increase revenues, regular customers build its financial stability. According to data collected by OutboundEngine, acquiring a new customer can cost up to five times more than maintaining contact and interest of a person who has already made a purchase.

What's more, the probability of a successful sale to a returning customer is 60-70 percent, while for a new user, this probability is between 5 and 20 percent.

In the case of a user who has already made a purchase, many problems, such as the issue of trust or unfamiliarity with the brand, disappear. The customer also remembers his previous, positive experiences (if they are negative, he will not return).

In addition, if a customer returns multiple times, the overall revenue from him and the benefits for the store increase further. For this reason, in the case of many customers, their value is considered not in relation to a single purchase, but the profit they brought throughout the entire period of their activities within the store's ecosystem.

This value, sometimes calculated for specific cohorts or averaged for all customers, is referred to as the Customer Lifetime Value (CLV), which can be translated as the value for the entire life of the customer.

What is Customer Lifetime Value

CLV is a marketing metric that is calculated based on the total revenue generated by a given customer. Although traditionally this metric belongs to marketing, in practice it is useful in every department. Its amount is influenced by factors such as the ability to maintain customer loyalty and user experience.

The CLV indicator is calculated by multiplying the average value of the basket, the average frequency of purchases, and the average length of customer activity. Increasing or decreasing any of these values affects the global CLVs for the store.

What are the benefits of high Customer Lifetime Value

A high CLV brings many benefits:

• Stabilization of revenue - a high level of the indicator is a signal that the company can expect stable revenues in the long term. With less dependence on new customers, business becomes more predictable, and thus, it is easier to plan further activities.
• Increasing the margin - a high level of customer lifetime value means that the generally high cost of acquiring a single customer is spread over a longer period. At the same time, a single customer regularly makes subsequent purchases, thanks to which the return on initial investment is growing.
• More funds for investments and development - high customer lifetime value also means that the company has more funds for further investments. An example may be the possibility of investing further profits from regular customers in acquiring new ones or in optimizing processes.

How to Maximize Customer Lifetime Value

Maximizing CLV brings many benefits and reduces the operating costs of a company, including an online store. The most effective strategies for increasing this indicator include:

Regular "warming up" of the collected customer base

Online stores mostly operate in the B2C model. However, marketing experience from the B2B segment, primarily related to the so-called "lead warming up" and constant communication with the recipient, can bring huge benefits if used in online stores.

An example of such activity is, among others, content marketing, i.e. preparing content tailored to the user's needs, useful for him, and encouraging him to stay in constant contact with the brand. Properly prepared content is also used to educate customers and even suggest reading the article as a form of spending time, for example during a coffee break at work.

Stimulating the need

In this case, all marketing activities known in e-commerce are necessary. The key is their proper use and preparation. For this reason, the following are particularly important:

• Customer data - as a rule, the more information, the better. Issues such as favorite products, the most common shopping combinations, or the cyclical nature of purchases can be important. In addition to statistical data, demographic data may be interesting - gender, age, date of birth, or marital status, depending on the goods sold in the store. For example, a jewelry store can organize targeted campaigns reminding about upcoming wedding anniversaries - of course, if the customer shares such information.
• Context - the effectiveness of marketing activities is also strongly dependent on the context. Examples are issues such as the calendar of holidays or the current economic situation. Combining context with personalized information can be especially effective - for example, sending specific promotions or samples from a baby goods store depending on the age of a child.

Push for higher cart values

Making regular and increasing purchases should simply pay off for customers. Companies have many tools that can help with that: gradually increasing discounts, loyalty programs, and order automation. Especially the latter option can be attractive as, for example, a "coffee subscription" - in exchange for a regular fee, the broadcaster (in this case Tchibo) offers customers discounts and additional promotions.

Cross-selling and up-selling activities are an example of activities encouraging larger purchases. When combined with additional information about the user, it is possible to achieve very good results - for example, cross-selling the most common product pairs for a specific user. According to information collected by FunnelStrategist, cross-selling can increase sales by up to 20% and revenues by 30%.

An interesting example of such action is the Allegro Smart program, which allows for free deliveries and other benefits for a small monthly fee paid to the marketplace operator.

Reward brand loyalty

In addition to the purchases themselves, loyalty to the brand should also be rewarded - a customer who makes small purchases regularly can bring the company more profit over the time than a customer that makes a big purchase once.

An example of encouraging brand loyalty can be a referral program running alongside a loyalty program that rewards users for bringing new customers and recommending brand products to friends. This means that there may be a situation where a single user does not make huge purchases or does not achieve a high CLV, but his actions will significantly expand the customer base at a low cost.

Listen to your clients

The most important element of building Customer Lifetime Value is listening to customers needs. Without getting to know their opinions and suggestions, in practice, it is impossible to provide good brand experience.

Customers opinions can be collected via surveys and user research. Among the most important metrics that should be tracked in this context, is the Net Promoter Score, i.e. the tendency of a particular user to recommend the company's services or goods to friends.

Another element of improving the CLV is the continuous optimization of the User Experience. For this purpose, you can use multiple tools that help studying the behavior of users on the website.

Summary

Customer Lifetime Value is maximized by providing users with the best possible experience and actively encouraging them to make larger purchases regularly.

This means that maximizing CLV is the result of building the best possible store.