Understanding the Basics of Customer Lifetime Value

For Ecommerce merchants and marketers, Customer Lifetime Value (commonly abbreviated as CLV or CLTV) is one of the most important metrics for understanding how your business is performing and how to grow it. Here’s the basics you need to know to get started improving your business.

What is it?

It measures the total revenue or profit a customer is expected to generate for a business over their lifetime.

Why does it matter?

  • Understanding the financial value of your customers can be used to make decisions about marketing, product development, and customer service.

  • Identifying your most valuable customers can be used to improve acquisition by finding more customers like these and improve retention by targeting these customers with special offers and promotions.

  • Understanding marketing campaign performance on a longer time horizon - if you are confident consumers will buy from you repeatedly, you can profitably spend more to acquire them

This sounds super useful, how do I calculate it?

First, there’s the overly simplified way.  You look at the average number of purchases a customer makes and multiply that by their average order value.  That will give you their lifetime value and you can look at how long they keep buying before they stop so you understand the time horizon.  But you’re going to want to take a deeper look.

The next best step is to divide your customers into cohorts based on when they purchased.  Your earlier customers are likely going to look different than your most recent customers in terms of behavior. By looking at slices across time you can understand how your business is evolving and what types of customers you are bringing in.

When you’re ready to get serious, bring in the experts and start looking at the data at a more individual level. Third party partners like Angler AI have made it easy to import your data and let their data scientists and artificial intelligence tools do a deep dive on who your most valuable customers are, what they like to buy and how to find more of them.

What else should I look out for?

Revenue is great, but don’t overlook the profit side of the equation.  Make sure to factor in direct and indirect costs for each of your products so you understand how much purchases are contributing to the health of your business, not just at the top line.

Once I know my CLV, how do I use it?

This is information that can be used in a variety of ways across your business.  For example:

  • How is my business really performing?  Am I getting high-quality customers and am I on a path towards profitability?

  • You can improve your financial forecasting - what do my cash flows look like?  Am I getting the right amounts and types of inventory?

  • How am I performing on CLV for each of my acquisition channels?  Which ones are driving the highest value customers?

How can I grow CLV?

The easiest way to improve CLV is to ensure that you’re bringing the right customers into your sales funnel - customers that will behave like your best customers.  That’s where a partner like Angler can supercharge your prospecting and make sure you are targeting the right users from the beginning.

You can also use this information to understand who your top customers are, what products they like and the timing for when they buy to use as inputs to improve your retention marketing tools.

You can also take a closer look at all your consumer touchpoints, including your product mix, your customer service and your return policies.  Any consumer touchpoint can play a factor in increasing CLV.

This is all looking backwards, can I predict behavior going forward?

Yes!  This is known as pLTV or Predicted Lifetime Value.  Once you have a robust understanding of how customers typically behave, you can build models to predict how new customers will behave, which will aid in financial forecasting and improving which customers you target in the future.

How do I know if the predicted model is any good?

Angler AI holds out a portion of the data (i.e. the last 6 months), runs the model on the rest of your data and then predicts what should have happened over that time period and compares those predictions to actual results.  If the numbers align well, then the model should provide a very strong signal on what to expect in the future.  This is known in the industry as “Holdout Validation” because you hold part of the data out to test against.

How do I get started?

Getting started with Angler is as simple as connecting your sales data to our AI engine so that we can start calculating the health of your business and help you start finding more great customers. 

Click here to connect with one of our representatives to get started.