LCV — Lifetime Customer Value — is an important focus for eCommerce Marketers.
Whether you’re using SEO, paid advertising, or social media marketing to generate leads and customers, it’s critical that you get a clear idea of what your Lifetime customer value is. Lifetime customer value (LCV) is simply the value of your average customer will generate for your business over the period of time they stay with you.
Neglecting this metric means that you are failing to get the most value out of your customers. Did you know that it costs businesses more money to acquire a customer than it does to market to them after acquisition? Many businesses also rely on backend sales to generate actual profit. For many businesses, this will become the norm as advertising and marketing costs continue to climb.
Considering these factors, you want to make sure that you put LCV on top of your priority list. The first step to getting started is figuring out your LCV number.
How to Calculate Lifetime Customer Value
The simple way to calculate LCV is to look at your data and figure out the average profit your customers generate for your business over their entire lifespan. You can then deduct this number by the average cost of customer acquisition (COA) to get your LCV metric. Some marketers just figure the average number of purchases before a customer moves on, but we like
If you don’t have much data to work with, you can use a projective model. Simply take the average profit from each transaction and multiply this number by the average number of transactions made by the average customer. Then deduct the customer acquisition cost to get your LCV number.
Businesses that have just launched or only recently decided to take LCV metrics more seriously need to approach the metric differently as well. It’s helpful to get a LCV metric for various time periods such as three months, six months, one year, and beyond. You can also take the attrition rate when projecting long term LCV numbers.
ABOVE: Calculating customer value in ecommerce is a part of the key calculations that indicate how well your store and product sales are doing, the Webdirexion team has for clients. On the lefthand side above, are six metrics to watch, including LCV. In the example at right, we factor in advertising spend for a calculation when a client is reselling printed T-shirts. This slide is from an eCommerce training by the Webdirexion team.
How Lifetime Customer Value Plays into Your Digital Marketing Strategy
Now that you have your LCV number, how do you even use it to improve your digital marketing strategy? The first way is to use it to increase your customer acquisition efforts. Many businesses are hesitant about paying more than their initial net profits. For example, let’s say business XYZ averages spends $20 to acquire a customer for a $50 sale. The net profit works out to $30.
To maintain healthy profit levels, business XYZ may not want to spend more than $30 to acquire a customer. This means that they may not increase their click costs in their pay per click campaigns, enter expensive digital marketing channels, or invest in strategies that have high upfront costs. This results in stagnated growth due to limited knowledge of their business metrics.
But if business XYZ figures out that their LCV works out to $150, they can be comfortable about spending $50, $60, or even $70 to acquire a customer. The business can increase their click costs for their PPC campaigns, enter challenging channels, and invest in more costly marketing campaigns. They can increase their rate of customer acquisition and grow their revenue.
Driving Marketing and Business Strategy with Your Lifetime Customer Value
Second, your LCV number is also a reflection of how effective you are with your digital marketing campaigns and overall marketing strategy. Are you doing a good job building a relationship with your customers? Are your branding initiatives effective? Are you sending out the right offers at the right times? What channels and strategies are producing the best results for the business?
You want to figure out how to increase your LCV using your existing data, testing various campaigns/strategies, and improving your customer relationships. You may also find that a certain segment of your customers have vastly higher LCVs than the rest. This may mean that you should be focusing more of your efforts on acquiring these customers and appealing to them.
The bottom line is that knowing and utilizing your Lifetime Customer Value LCV data is vital to your ecommerce business growth. It’s what often separates small businesses from big businesses. It often determines the market and industry leaders. If you’re not using LCV to drive your marketing and business strategy, you are putting yourself at a disadvantage. You can learn more about ecommerce and woocommerce marketing strategies here.
