How to Calculate Customer Lifetime Value for Ecommerce: Quick Guide (2023)

Understanding the lifetime value of your customers is key to determining your ecommerce business's profitability. The Customer Lifetime Value (CLTV) is a metric that indicates the total revenue a business can reasonably expect from a single customer account. In this article, we'll discuss how to calculate your customer lifetime value in ecommerce, what factors to consider, and how to use this data to your advantage.

What is Customer Lifetime Value?

Customer Lifetime Value is the total net profit that you make from any given customer. It's a projection that indicates the net profit attributed to the entire future relationship with a customer. The importance of knowing your CLTV as an ecommerce business is that it helps you to identify how much money you should be willing to spend on acquiring new customers and retaining existing ones.

How to Calculate CLTV

The calculation for CLTV differs from business to business depending on the nature of the business and the data available. However, a general formula to calculate CLTV is:

CLTV = (Average Purchase Value x Purchase Frequency) x Average Customer Lifespan

• Average Purchase Value: This is calculated by dividing your company's total revenue in a time period (often one year) by the number of purchases over the course of that same period.
• Purchase Frequency: This is calculated by dividing the number of purchases over the course of the time period by the number of unique customers who made purchases during that time period.
• Average Customer Lifespan: This is the average number of years a customer continues purchasing from your company.

Factors to Consider When Calculating CLTV

• Retention Rate: Your customer retention rate is a key part of calculating CLTV. The higher the retention rate, the higher the CLTV.
• Margin: Your margin or profit margin per customer also plays a role in CLTV. If you have a higher profit margin, you'll have a higher CLTV.
• Discount Rate: The discount rate is used to calculate the present value of future cash flows. This is necessary because $1 today is worth more than $1 in the future due to inflation and the cost of capital.

Ways to Increase Your CLTV

• Improve Customer Service: Superior customer service often leads to increased customer loyalty, resulting in a higher CLTV.
• Personalized Marketing: Personalization can lead to higher conversion rates, repeat purchases, and increased customer loyalty.
• Customer Loyalty Programs: These programs can incentivize repeat purchases, increasing purchase frequency, and thus, CLTV.

Conclusion

Understanding your Customer Lifetime Value is essential for any ecommerce business. It can help you identify the most profitable customer segments, determine how much to spend on customer acquisition, and shape your overall marketing and retention strategies.

Remember to regularly calculate and track your CLTV to keep a pulse on how changes to your business strategy impact the value each customer brings over the course of their relationship with your business.