Last week I went over a super easy way to calculate a rough customer lifetime value (CLV) for your store. No confusing formulas or complicated spreadsheets needed. But what do you do with your CLV once you know it? Here are some actionable ways to use your customer lifetime value.
1. Benchmark Your Efforts
Let’s start with the most basic way to use your CLV. Today’s most successful stores are tracking CLV to determine the long term sustainability and profitability of theirs stores. They are striving to always increase CLV but they need to know if they are improving. That is where benchmarking comes in.
I would recommend calculating your CLV at least once a month and recording where you are at (benchmark) to see if your initiatives are driving the needle forward. You will never know if you have improved if you don’t know where you were.
2. Decide where to Invest for CLV Growth
When you know your customer lifetime value, you can analyze it to figure out areas that will provide the most impact when trying to improve it. Essentially your CLV is the product of three factors:
- Your Average Order Value
- Your Purchase Frequency
- Your Customer Lifespan
When you look at your CLV as a product of three different components you can determine which area needs the most help and invest in that area more heavily. For example if you notice that your average order value (AOV) is the lowest component of your CLV you can look at boosting it with tactics like cross-selling, product bundling, and more.
Similarly if you are having a tough time with your purchase frequency you can try some tactics like gamification and points programs to get customers returning more often. When you look at your CLV as three parts you will have a much easier time influencing it.
3. Discover Your Most Profitable Acquisition Channel
CLV calculations are not just done as an average for your store. They can also be used on a segment of your customers. In fact, this is one of the most actionable ways to use your customer lifetime value.
One of the best ways to segment your customers for CLV is by acquisition channel. When you segment your customers in this way it gives you two very actionable pieces of information. First it shows you which channel is creating the most profitable customers, and second it shows you how much a customer from each channel is worth.
Let’s say that your marketing department decides that there are not enough customers coming from social channels. You decide to implement a social media marketing campaign to attract more customers in this low acquisition channel. This seemed logical when you don’t know your channel CLV, but when you do you can see this could be a losing strategy.
This Graph is from Custora’s Customer Acquisition Snapshot
Knowing the CLV of different channels allows you to allocate resources to channels that generate the most value for your business.
The other piece of actionable advice you can get from your channel CLV is the price you are willing to pay per customer in each channel. If the CLV of a CPC customer is $204 and a banner ad customer is $102 you should be willing to invest twice as much to acquire a CPC customer than a banner ad one.
4. Discover Your Most Profitable Customer
Another actionable way to use your customer lifetime value is to discover what your ideal customer looks like. You can do this by conducting CLV calculations on different demographic segments such as: age, gender, location, browser. When you know what your most profitable customer looks like you can tailor your offerings to suit their needs
For example you could conduct a CLV analysis on customers from different states.
This image is from Custora’s Customer Acquisition Snapshot
This type of analysis would allow you to better target your CPC ads to get the most profitable customers possible. You can also tailor your blog articles, website, and products to capture more of your most profitable demographic.
5. Handle Customer Complaints
The last two pieces of actionable advice relied on doing CLV analysis on a segment of customers. This is a way of using CLV on an individual level. You can do this by pulling up sales info for an individual customer and analyzing their average order value and purchase frequency.
This is incredibly useful when you are dealing with customer complaints. When you know exactly how much a customer is worth to your store it becomes a lot easier to justify (or not justify) spending money to keep them. This could be in the form of free products, coupons, or free returns.
Knowledge is power for your customer service agents! Knowing personal CLV makes customer service decisions much easier.
Actionable Ways to use Your Customer Lifetime Value
Just calculating your store`s CLV put you in the top 5% of ecommerce stores, but knowing what to do with the information makes you elite! Using your customer lifetime value to make decisions will ensure that you are always making the best decisions for future success.