Ensure Your E-commerce Site Is GMI by Understanding Customer Lifetime Value
When it comes to financial gains and losses, e-commerce sites frequently concentrate on the most obvious measures of success (along with sales and profit growth). Nonetheless, it’s crucial to base long-term decisions on reliable information and first-party data such as customer lifetime value (CLV). When determining your business's long-term viability, understanding the impact of CLV is non-negotiable.
How much do you value a customer over the long run?
If you want to figure out if your e-commerce site is successful, assess the quantity of sales you've achieved so far. Additionally, it's critical to have a sense of how much money you'll earn in the future. This is accomplished via the CLV metric.
You can use each encounter with a typical customer to determine their CLV. By integrating this data, you have a better understanding of your consumers' experiences. As a result, you can make more educated marketing and sales choices.
Clearly, this is not a straightforward calculation. Fortunately, you can address numerous commodities, their price, actual purchase frequency, and volume to obtain a true picture. Thus, your average revenue and profit should be calculated on a total basis.
Also, by calculating your CLV, you can develop a prudent and cost-effective strategy. Unquestionably, certain types of clients are more important to your e-commerce business than others. As a result, prioritizing which ones to focus on and where to direct your efforts is critical.
How does CLV impact e-commerce profitability?
Invariably, it is clear that consumer loyalty programs can have a significant influence on revenues. Loyal customers make it easier to create and market your company. In addition, 81 percent of marketers believe that measuring CLV helps with sales, according to a Criteo report.
Also, the likelihood of selling to a new prospect is between 5% and 20%, whereas the likelihood of selling to an established customer is between 60% and 70%.
What is the average lifetime value of a customer via your e-commerce site?
Well, the cost of acquiring a customer should be three times the cost of retaining one (CAC). If you spend $200 on marketing to get them in, they should have a lifetime value (LTV) of at least $400.
Don’t forget the benefits of developing long-term relationships with your customers
Your brand's most loyal customers are those who will spread the word about your e-commerce site to their friends and family, resulting in increased sales and market share. Customer loyalty is crucial to your business success because it contributes to the development of your brand's reputation within a certain demographic or geographic area.
Additionally, increased ROI may result in more predictable cash flow and higher profit margins. When resources are invested in enhancing CLV by predicting and meeting the needs of your customers, you can then reinvest your additional earnings. Moreover, you can translate increased CLV into employee expansion, company growth, marketing, R&D, and more.
To see how vital CLV can be, consider answering the following questions:
Did your latest product launch outperform the competition in terms of new or returning customers?
Were your most recent marketing tactics worth the cost?
What you can do is use CLV and conversion rates to assess what is working and what you need to modify.
How many customers return for more?
Not all customers are equal, and loyal consumers should be rewarded. For instance, returning customers can generate between 20% and 30% of your e-commerce site’s yearly revenue. So, it makes sense to identify your highest spenders, how frequently they make purchases, and what they like to buy. Hence, you can ensure they always have what they want in stock and the prices or special discounts to keep them coming back.
Now, let’s get to the heart of the topic.
Learn how to calculate CLV
To begin, determine the average cost of a transaction on your site. Keeping track of this data should be pretty straightforward. Start with your first month’s earnings.
Next, compute the average number of transactions over a certain time period. Incorporate the types of products and services you sell.
To illustrate, while a fast casual restaurant may see the same customer every week, a car dealership may see the same customer only every few years or decade. Why does this matter? Because CLV is determined by the number of visits.
Additionally, it is critical to determine how long your customers may remain loyal to your e-commerce business. Once you have collected all the necessary figures, use this formula:
Key takeaways
When customers interact with your e-commerce store, they want to be seen and recognized, and they want to trust they can depend on real professionals with whom they can develop a personal connection. It’s no longer enough to have an amazing product; you must also pay attention to minute details.
However, you can forecast future sales and profitability by comparing the CLV to customer acquisition costs (CAC).
In addition, if you know your CLV, you can enhance your revenues by optimizing your marketing strategy accordingly. As a result, you can determine which marketing initiatives are succeeding and which are not rather quickly.