eCommerce Customer Lifetime Value: What it is and how to use it (2024)

Customer Lifetime Value (LTV) is the total revenue a customer is expected to generate for your business over the entire duration of their relationship with your brand. Unlike ROAS, which focuses on the short-term return on marketing spend, LTV offers a long-term view. It tells you how valuable a customer is to your business over time, making it a key metric for strategic planning and resource allocation.

What many brands get wrong is that customer acquisition and LTV have a very important relationship. A better LTV lets you be more aggressive with your acquisition efforts, because you can be more confident in recouping you customer acquisition costs (CAC) due to more sustainable growth.

To help you understand customer lifetime value in ecommerce, we're going to unpack the following:

• Why sustainable growth comes from acquisition AND customer lifetime value

• When does it actually make sense to begin to optimize your LTV in ecommerce?

• How do you calculate customer lifetime value (LTV)?

• How do you go about increasing customer lifetime value (LTV)?

Why Chasing Acquisition Without LTV is a Losing Proposition

Focusing exclusively on customer acquisition without understanding or optimizing LTV is a short-sighted approach. Consider this scenario:

• High Acquisition Costs: Suppose you’re running a campaign with a solid ROAS. For every $1 spent, you’re getting $3 back. But if your profit margins are tight and those customers never return, you might be barely breaking even or worse.

• Short-Term Gains: Acquisition-focused strategies might bring in new customers, but if these customers aren’t sticking around, the long-term impact on your business is minimal.

• Increased Risk: As customer acquisition costs (CAC) continue to rise, businesses that don’t optimize LTV might find themselves in a vicious cycle of spending more to acquire customers than they’re worth, ultimately leading to financial strain.

Example: A beauty brand pours money into Instagram ads, achieving a high ROAS initially. However, the brand fails to track and optimize LTV, leading to a situation where customers buy once during a promotion and never return. As competition increases and CAC rises, the brand spends more on acquisition just to maintain revenue, without building a loyal customer base. Eventually, acquisition costs outpace revenue, leading to profitability challenges.

Why Sustainable Growth Comes from LTV, Not Just Acquisition

Sustainable growth is about scaling profitably, not just increasing revenue. Here’s why LTV is critical:

• Profitability Over Time: Focusing on LTV means ensuring that the revenue generated by a customer over their lifetime exceeds the cost of acquiring them.

• Resilience: Brands that prioritize LTV are better equipped to handle fluctuations in the market, such as increased competition or rising ad costs.

• Enhanced Acquisition: With a strong LTV, you can afford to invest more in customer acquisition, knowing that each customer will contribute more to your bottom line over time.

Sustainable Growth Defined:

• Profitable Scaling: Growing your business in a way that ensures profits increase alongside revenue.

• Investment Flexibility: Higher LTV means more available capital for reinvestment in growth initiatives.

When Should You Focus on LTV Optimization?

Tracking LTV is always important, especially if your goal is sustainable growth. But when should you start actively focusing on LTV optimization?

• > $1M in Revenue: If your brand is generating over $1 million annually, it’s time to invest in LTV optimization. At this stage, you’ve likely achieved product-market fit and have a steady stream of customers. Optimizing LTV will help you maximize the value of each customer, making your growth more efficient and sustainable.

• Profitability Focus: Even if profitability isn’t your immediate goal, optimizing LTV increases your ability to reinvest in growth, making it easier to scale.

• Growth Investment: More profit means more opportunity for reinvestment in product development, marketing, and other growth drivers.

Key Components of LTV

To optimize LTV, you first need to understand its components:

• Average Order Value (AOV): The average amount a customer spends per purchase.

• Purchase Frequency: How often a customer makes a purchase.

• Customer Lifespan: The average duration a customer continues to make purchases from your brand.

• Gross Margin: The profit margin on the products sold to the customer.

Each of these factors plays a role in determining your overall LTV. By understanding and optimizing each component, you can significantly increase the lifetime value of your customers.

How to Calculate LTV

Calculating LTV can be simple or complex, depending on your needs:

• Basic Formula: LTV=AOV×Purchase Frequency×Customer Lifespan×Gross Margin\text{LTV} = \text{AOV} \times \text{Purchase Frequency} \times \text{Customer Lifespan} \times \text{Gross Margin}LTV=AOV×Purchase Frequency×Customer Lifespan×Gross Margin

• Segmented LTV: For more granular insights, calculate LTV for different customer segments (e.g., by behavior, acquisition channel) to guide targeted marketing strategies.

• Advanced Models: Consider using cohort analysis or predictive analytics to track LTV over time or forecast future value.

Tactics to Impact LTV

Once you’ve calculated your LTV, the next step is to improve it. Here are some tactics:

• Personalized Loyalty Programs:

  • Encourage repeat purchases by rewarding loyalty with personalized offers and rewards.

  • Implement tiered programs that increase benefits with customer engagement.

• Subscription Models:

  • Offer subscription-based services or products to ensure recurring revenue.

  • Provide exclusive perks to retain subscribers.

• Customer Experience Enhancements:

  • Invest in customer support to increase satisfaction and retention.

  • Optimize the user experience across all touchpoints.

• Cross-Selling & Upselling:

  • Recommend related products during checkout to increase AOV.

  • Use personalized emails to suggest upgrades or complementary products post-purchase.

• Retention Campaigns:

  • Target lapsed customers with special offers to re-engage them.

  • Use predictive analytics to identify at-risk customers and address their needs proactively.

Managing LTV without being overwhelmed

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Key Takeaways

Tracking and optimizing LTV isn’t just about understanding the value of your customers—it’s about driving sustainable, profitable growth.

• Track LTV regularly, just like ROAS.

• Optimize LTV for sustainable, profitable growth.

• Invest in LTV strategies when your business hits $1M+ in revenue.

• Remember, managing LTV well can enhance your acquisition efforts and give you a competitive edge.

By incorporating these principles into your strategy, you’re not just aiming for growth—you’re aiming for growth that lasts.

FAQ on LTV

• How often should I calculate LTV?

  • Regularly—quarterly or semi-annually. This helps you track trends and adjust strategies as needed.

• Can LTV vary by customer segment?

  • Yes. Different segments may have varying purchase behaviors and profitability, making segmented LTV calculations valuable for targeted strategies.

• Is LTV only for large brands?

  • No. Even small eCommerce brands can benefit from understanding and optimizing LTV, as it’s a key driver of profitable growth.

• What’s the biggest mistake brands make with LTV?

  • Focusing solely on acquisition while neglecting retention and customer experience, which are critical to maximizing LTV.