As an ecommerce business owner, there's no shortage of metrics to track—from repeat purchase rate to average order value.
And while there are endless ways to measure the success of your marketing efforts, you can’t get away without a thorough understanding of the concept associated with customer lifetime value, or LTV.
Ampd’s ad automation toolkit can help you optimize your Google Ads campaigns to drive more traffic to your website, but LTV is crucial to analyze the effectiveness of your ecommerce acquisition strategy and increase the retention of existing clients.
Today, we are going to cover everything you need to know about customer lifetime value in ecommerce.
What is Customer Lifetime Value (LTV)?
The lifetime value of an ecommerce customer, or customer lifetime value, is a marketing metric that represents the total amount of money a customer is expected to spend on your products or services during their lifetime.
LTV is a measure of how valuable each customer is to your company, not just on the basis of a single purchase, but across the entire relationship. Increasing LTV of your existing customers is an excellent way to drive business growth, as it costs much less to keep existing clients than it does to acquire new ones.
Why is Customer Lifetime Value Important for Ecommerce Businesses?
Understanding your LTV can give you meaningful insights into the performance of your ecommerce marketing strategy and help you directly influence your customer’s journey.
Here is why you should track your customer lifetime value:
Reduce Customer Acquisition Costs
Getting new customers can be an expensive affair. In fact, acquiring a new customer can cost five to 25 times more than retaining an existing one.
As such, identifying and nurturing most valuable customers is absolutely critical to your business success. By doing so, you can increase the average LTV, reduce customer acquisition costs, and achieve higher profit margins.
Target Ideal Customers
When you understand the lifetime value of your ecommerce customers, you also understand how much time they spend with your brand over a period of time. Armed with this knowledge, you can plan a customer acquisition strategy to target customers that are willing to spend the most on your business.
Improve Customer Loyalty and Retention
When an ecommerce business optimizes its LTV and consistently delivers excellent products, outstanding customer support, or valuable loyalty programs, it tends to boost customer loyalty and retention.
And more loyal customers translate to a lower churn rate, as well as increased referrals, sales, and positive reviews.
Grow Your Revenue
Of course, you can boost your business revenue significantly by running and managing Google Ads campaigns with the help of Ampd’s ad automation system.
In addition to that, knowing your LTV can help to identify specific customers who contribute the most to the bottom line of your business. This allows you to provide these existing customers with services or products that they like, leading to them spending even more money on your brand, and thus growing your revenue.
How to Calculate Average Customer Lifetime Value
You don’t need to be a math genius to figure out your brand’s average customer lifetime value.
In its simplest form, LTV can be calculated by multiplying the average order value by the average customer’s purchase frequency, and then multiplying by the average customer lifespan:
LTV = Average Order Value x Average Purchase Frequency * Average Customer Lifetime
Note that:
- Average Order Value = Total Revenue / # of Orders
- Average Purchase Frequency = # of Purchases / # of Customers
- Average Customer Lifetime = Sum of Customer Lifetimes / # of Customers
Let’s say, the average order value in your online store is $150, and the purchase frequency is twice a year. In addition, the average lifetime of your customers is three years. Your ecommerce average customer lifetime value would then be: $150 x 2/year * 3 years = $900.
Of course, there are different versions of this formula depending on how thorough you want to get. However, using this calculation to find your ecommerce LTV will give you a good idea of where you stand.
How to Improve Customer Lifetime Value
Once you figure out your ecommerce customer lifetime value, you can implement certain strategies to increase it:
- Over-deliver. One sure way to improve LTV is to over-deliver on your brand promise and customer expectations. Rather than making bold claims you can’t meet, make reasonable promises and over-deliver on them.
- Optimize your client onboarding process. Customer onboarding is the first and most important opportunity to impress your customers. When done properly, onboarding will motivate shoppers to come back to your products again and again, thereby increasing their lifetime value.
- Build relationships. Customers spend money on your products because they are trying to fulfill a certain need. To boost their LTV, you will need to think ahead, beyond their immediate needs.
- Increase the average order value. An easy way to improve LTV is to increase the average value of your order. For example, you can offer additional relevant products when a customer is about to check out.
- Improve customer service. If you are looking for ways to boost customer lifetime value, focus on providing exceptional customer service, personalized to each and every customer.
Take Your Ecommerce Business to the Next Level with Ampd
Without a doubt, understanding and improving customer lifetime value is among the most important factors needed for the success of your ecommerce business. It allows you to improve customer loyalty and retention, grow your revenue, and target your ideal customers.
In addition to improving your average LTV, it is worth investing into setting up an efficient Google Ad campaign that will drive even more potential customers to your website. Ampd’s unique ad automation toolkit will set you up for success and eliminate 90% of the effort of launching and managing ads. Get ampd now.
