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Understanding LTV (or CLV)
As an ecommerce business owner, understanding customer lifetime value (LTV or CLV) is pivotal. This metric offers insight into your business’s health and customer behavior.
At Tydo, we view customer lifetime value (LTV) as how much a customer is worth or the value of a customer for their entire relationship with your business or buying process. We can think of it as how much money a customer will bring in over their entire future relationship with a brand.
Customers who’ve been with you longer are considered more valuable than your newest customers because they’ve placed orders and spent money for much longer, and will hopefully continue to do so.
The lifetime value of a customer offers a snapshot of the shopping habits and experiences of your best customers. Another benefit to tracking LTV? You can start to see purchasing behaviors and patterns and then focus on the customers who provide the most value.
Seeing which customers consistently return and bring in the most money to your business allows you to focus marketing and advertising efforts on them and continue to grow.
How to calculate LTV
LTV: The total amount of money a customer has spent to date
Data sources: Shopify
Example
Let’s imagine Sally made her first purchase from your online candle store in April 2008. From 2008-2013, Sally made 5 purchases from your store. She made one purchase every year. After that, she never bought something from you again. Sally’s LTV would be the sum of her 5 purchases.
We can compare this to Bob who made his first purchase from your online store in 2015. After that initial purchase, he made 3 more purchases from your store within the next 4 years and then never purchased from your store again. Bob’s LTV would be the sum of those 3 purchases over those 4 years.
It’s also important to note that it’s helpful to look at LTV through time increments: 6-month LTV, 12-month LTV, etc. You can also look at LTV by looking at customer segments via cohorts.
Takeaway
LTV is like finding a credit card that offers great points and bonuses By staying loyal over time and continuing to use that same credit card, you’ll get better credit limits, travel points, and exclusive access to perks. These are the most valuable customers.
Why is understanding LTV important? It gives you an idea of how much value a customer or group of customers brings to the business and where improvements can be made in the customer journey.
Paying close attention to LTV:
- Highlights how well the business retains customers over time
- Shows you where you need to place more attention
- Helps you forecast predictive revenue and where the business is heading
It’s important to look at LTV through a time frame. We recommend tracking your customer’s LTV over 3,6,9,12, and 18-month periods. This context provides more insight into your customers at various parts of the customer journey.
You can also segment your customers’ LTV to discover even more interesting patterns and trends. You can consider segmenting:
- LTV by time since first purchase
- LTV by product first purchased
- LTV by discount used
- LTV by marketing channel
- LTV by subscription
Tracking LTV and looking at customer segments also helps you see the bigger picture. You can leverage this data to answer key questions:
- Are your existing customers driving enough total revenue to make you profitable?
- Are customers profitable compared to their acquisition cost (CAC)?
- Is LTV trending up or down?
- Are new customers performing better than customers acquired last year?
- Are certain landing pages bringing in higher LTV customers?
- Which discounts are attracting the highest LTV customers?
- Does the LTV for subscription customers differ? Does it change throughout the year?
- Which influencers are driving high LTV customers to the business?
Ready to level up your learning?
Read more about LTV
What is the CAC to LTV Ratio?
Running an effective ecommerce business doesn’t require you to pay attention to a single metric but rather watch how different metrics work together. This gives you a clearer picture of the business's operations and helps you leverage that information where needed.
Tracking the customer acquisition cost (CAC) against your LTV helps you determine if the cost of acquiring customers is paying off in terms of how much revenue these customers bring to the business. By tracking this ratio (CAC to LTV), you’ll see if you need to make adjustments to your marketing budget and your strategy.
Just like how you don’t want to focus on any one specific metric, tracking LTV alone doesn’t offer the full picture. You want to look at LTV compared to your paid advertising efforts (and other marketing channels) to see if your current strategies and campaigns are paying off.
What is a good LTV to CAC ratio?
When tracking an LTV to CAC ratio (often denoted as LTV: CAC), there are a few factors to consider.
A 1:1 ratio means that your cost to acquire a customer is the same as their value. You’re still likely losing money due to factors outside of marketing (shipping cost, taxes, etc.). You’re 100% losing money if it’s lower than a 1:1 ratio.
Ideally, you want the ratio to be 2:1, 3:1, and 4:1. This means that the value of a customer is 2, 3, or 4 times what you spent to acquire that customer in the first place. If it’s higher than 4:1, you might consider increasing your ad spend.
What is a Good LTV?
As with all metrics, an ideal LTV number depends on factors such as average over value (AOV), industry, product category, churn rate, how long your customer takes between purchases, and more.
How to Increase LTV
How do you increase the LTV of your customers?
Alex Greifeld says that if you want customers with a high LTV, you should use copy that speaks to your brand as a lifestyle or solution. She also recommends focusing your ad spend and high-funnel marketing tactics on those in higher-earning zip codes or setting parameters that target high household incomes. Ultimately, you want to play a long-term game.
Explore product extensions
Launching new products (especially those that complement your existing products) helps increase a customer’s LTV. Why? It engages (or re-engages) your customer and gives them a reason to stick around. Plus, if the product is complementary to your existing product offerings, it encourages customers to make repeat purchases.
Cody Plofker, chief marketing officer at Jones Road Beauty, recommends improving product desirability. What does that mean? It looks like improving the offer on a great product. How do you do that? Create bundles with your best-selling products (which will improve AOV metrics, too), or give something for free with purchase.
While growing a loyal customer base for Jones Road Beauty, the brand has launched new products in a cadence that makes sense for the brand while creating bundles with their best-sellers.
Invest in customer experiences (CX)
Build hype and excitement for your brand through great customer experience (CX). A great unboxing experience sets a good first impression with new customers and highlights a quality that will encourage them to make a repeat purchase.
For example, Graza uses customized packaging to attract attention and excitement. QR codes on the back of the bottle make reordering easy and convenient for customers as well.
Simplifying the return process is another good place to return your customer experience, especially if you sell products that require customization, such as clothing or cosmetics. Nothing sours a customer experience more than the hassle of returning or exchanging items, so focus your efforts on customer support strategies that will move the needle.
Customer experience and retention expert Eli Weiss explains, “Brands must ensure customers have the most frictionless and effortless experience possible.” He says surveys are a great tool for brands to learn more about the customer experience, but the gold is in the follow-up questions you ask.
Leverage subscriptions
Subscriptions are a powerful tool in your ecommerce toolbox, and they’re one of the most effective ways to boost LTV.
In addition to offering customers convenience, subscriptions drive customer loyalty and repeat purchases (critical for ecommerce brands and an opportunity for predictable revenue) and reduce churn.
A subscription business model is also an opportunity to introduce post-purchase cross-sells and increase AOV.
For example, Butcher Box includes incentives such as receiving free products in their email campaigns, and during the checkout process, various upsell opportunities allow customers to add on items independently of their subscription.
Starface offers a risk-free, fee-free subscription program to attract customers, while Joggy and Olipop offer exclusive discounts on products and free shipping for their subscription members.
Introduce a loyalty program
Giving rewards to returning customers is a powerful incentive for building brand loyalty.
How do you stand out with a loyalty program? Offer customers value that’s not necessarily tied to spending money but being an active community member.
- Blume does this by offering free products, an option to earn merch, and other rewards by taking specific actions such as engaging on social media or leaving reviews.
- Printfresh offers free shipping, coupons, and exclusive access to new launches through its loyalty program.
- Book of the Month rewards customers with branded merch and free books the longer they’re part of the subscription.
- Fly by Jing recently launched a membership program, where members can get exclusive discounts, early access to product drops, seasonal gifts, members-only products, and more.
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