What Is Customer Lifetime Value (CLV) & Why Is It Important?

Customer lifetime value (CLV) is one of the most important metrics in eCommerce. It offers a long-term picture of the business, and indicates its financial viability. If your business has high CLV, it indicates brand loyalty, recurring revenue and strong product to market fit.

What Is Customer Lifetime Value?

CLV is the total revenue that the customer can bring to your business over time. It factors in a customer as not only a one-off purchaser, but as a long time returner to your store. The more customers who invest in your business in the long term, the higher your CLV will be. It’s therefore a great way to understand customers' satisfaction, and see the strength of your brand. Ideally your CLV will be as high as possible.

How To Calculate Customer Lifetime Value

CLV can be calculated in two ways:

1. Accumulated Data Method

2. Average Estimate Method

Accumulated Data Method

This way of calculating CLV is very accurate, as it depends on you having historical sales data. You can work out CLV based on real life examples from customers; how much have they spent over their lifetime?

Ecommerce analytics tools come in handy here, you just need to have already been running your business for a while for this to have worked.

Average Estimate Method

This second method is more applicable to businesses who have just opened, and do not have historical sales data. You can work this out by taking the average order value against the number of orders you receive from each customer.

Why Is Customer Lifetime Value Important?

CLV is important because it is the backbone of a financially stable eCommerce business. It is able to predict the impact that a business will have long-term, meaning better ROI and unit economics. It is preferable to prioritize this over a short-term strategy because it reduces the need for constant new customer acquisition, which is costly and time-consuming.

Boosted Sales

A better CLV means better profits. When you cancel out sales vs new customer acquisition, this can end up being smaller margins. Repeat customers reduce this acquisition cost, increasing the ROI.



Steady Cash Flow

Having subscription customers, or strong CLV means that you are assured a cash flow. This regular income stream means you can calculate finances more efficiently, and understand the general income of your business.

Acquiring More Customers

If you can be assured that CLV will be higher, your acquisition budget can be stretched towards your perfect target group as opposed to individual, more short term customers. The better leads might cost more, but will lead to more loyal customers which are ultimately better for your brand. You can actually find the right customers for you.

Business Growth

With bigger margins, you can invest back into your business. This means the potential for new products, hiring new strategists and other personnel, or adding more elements to your site such as AI optimization. The possibilities are endless.

Conclusion

There are lots of reasons to prioritize CLV in your eCommerce strategy. It goes hand in hand with customer retention, satisfaction and brand loyalty. Having repeat customers ensures that your business can grow organically and independently, with a stable income.