Running an eCommerce business on a platform like Shopify inevitably means you’ll need to track dozens of metrics and KPIs to ensure your online store is successful. If you’ve been in the eCommerce space for a while, you’ve no doubt learned all about some of the most crucial metrics, like conversion rates, customer retention rates, and average order volume. However, there is one incredibly important metric that many store owners overlook, and it can be a game-changer for your online business.
It’s called customer lifetime value.
Customer lifetime value, often abbreviated as CLV or LTV, is a metric that estimates the total amount of money that a particular customer will spend in your store over the duration of their lifespan. As a platform, Shopify allows businesses to track CLV and use it to create benchmarks for things like customer acquisition costs or CAC.
Most importantly, CLV is a tool that can be leveraged to reduce your overall costs and create better long-term results for your business. Since acquiring new customers is one of the most costly aspects of running an eCommerce store, focusing on good CLV numbers will help you improve your revenue by increasing the amount of income produced by loyal customers who return to your store again and again.
In this blog, we’ll be taking a deep dive into the intricacies of Shopify customer lifetime value, as well as some of the most effective ways to improve your CLV and generate lasting results for your brand.
- Why Shopify Customer Lifetime Value Matters
- Customer Lifetime Value Vs. Cash Conversion Cycle
- How LTV Impacts CPA
- Two Ways To Find Your Shopify LTV
- Find Your LTV With The Shopify App
- Find Your LTV With A Third Party App
- Turning Your LTV Into Actionable Insights
- Mining Customer Cohorts
- Facebook Bidding
- LTV: Why It’s The DNA Of Your Product
- How To Use Cohort-Based LTV Forecasting
- New Customer Revenue
- Existing Customer Revenue
- Analyzing What You Need To Fix In Your LTV
- Find Support For Your LTV Goals
Why Shopify Customer Lifetime Value Matters
Source:- https://www.returnlogic.com/blog/shopify-customer-lifetime-value-clv-free-calculator/
When it comes to operating on platforms like Shopify, many eCommerce stores take a myopic approach to running their business. In other words, they focus on short-term KPIs to drive results, like conversions and new customer acquisitions. The problem with this way of thinking is that it doesn’t help you build customer loyalty with the audience, which provides you with a consistent revenue stream for repeat purchases.
That’s why brands who choose to make CLV an integral part of their growth strategy are more likely to be successful in the long run. Not only will they be able to use their CLV benchmarks to lower their CAC, but they’ll also be leveraging the most predictable source of revenue that their Shopify store has to offer: existing customers.
Having this source of revenue available to you also helps you accurately predict your growth and make forecasts for your finances so you make informed decisions about the way you spend your advertising dollars moving forward.
Put simply; CLV puts more focus on the dollar signs and less on the percentages, which is where true business success lies.
Customer Lifetime Value Vs. Cash Conversion Cycle
One of the main reasons why brands don’t make LTV part of their growth strategy is that they simply don’t have to figure out the lifetime value of their customers, so they focus their efforts on avenues that yield more immediate results.
And they’re not wrong.
For most small eCommerce brands, their cash flow could easily run out before they’ve reached a point where they can accurately assess their LTV. Instead, we recommend focusing on your brand’s cash conversion cycle. Your cash conversion cycle is the window of time it takes for your eCommerce store to convert your investments into a profit. This number may vary from one business to another, but 60 days is generally a good place to start.
With this method, you can narrow down the length of time it takes for you to determine your LTV and create a more streamlined approach to maximizing your results based on your brand’s unique needs. Essentially, you’ll be optimizing the LTV for a customer within your cash conversion cycle.
How LTV Impacts CPA
To get a better idea of how LTV impacts your CPA, you need to first understand that marketing channels like Facebook and TikTok act as a bidding system. That means that the brand that is able to bid higher dollar amounts on its ads will ultimately come out on top.
CPA, or cost per action, is the metric used to measure how much money it costs you to receive a single action on your paid advertisements. So, without a strong LTV, you’re severely limited on how much money you’ll be able to bid because your entire cash flow is reliant on new customer acquisitions.
On the other hand, if you already know you have a strong LTV, you can take more chances by bidding higher on your marketing campaigns, empowering you to push your competition out of the picture one ad at a time.
Two Ways To Find Your Shopify LTV
Thankfully, finding your Shopify customer lifetime value isn’t complicated, especially if you choose to use a window close to your cash conversion cycle. There are two easy ways to find your current LTV:
Find Your LTV With The Shopify App
eCommerce brands choose Shopify because the platform is relatively user-friendly and comes with an abundance of KPI tracking tools you can you to maximize your results, including finding your LTV.
Here’s how to do it…
- Open the Shopify app.
- Go to your Analytics dashboard.
- Select Customer Cohost Analysis.
- Open the report.
- View the LTV for your customers within a specific time window, including days, weeks, or months.
Find Your LTV With A Third Party App
Alternatively, you can also find your LTV using third-party tools. We recommend Lifetimely for this because it’s relatively easy to use and provides more advanced analysis options if you want to really dig into your LTV numbers.
Here’s how to do it…
- Download the Lifetimely app and create an account.
- Link Lifetimely to your Shopify app.
- Use the dashboard to assess your LTV on a daily, weekly, or monthly basis.
No matter which option you choose, you’ll be relieved to discover that finding your LTV is much more simple than other key metrics and doesn’t require any additional calculations on your part. That being said, using your LTV to create actionable strategies for your brand is another story entirely.
Turning Your LTV Into Actionable Insights
Something to keep in mind about LTV is that it’s never set in stone and can always be improved by creating stronger selling points throughout your customer’s journey. However, to do this effectively, you need to know how to take your current LTV and translate it into actionable insights.
Let’s look at an example…
If you have a brand that improved your LTV by 25% within the 60-day cash conversion cycle window, you could take that 25% and use it to invest more money into your customer acquisition methods, allowing you to steadily overrun your competition in the marketplace. That’s exactly what we mean when we talk about using our LTV to win big.
To get started, we use a software called Statlas. Essentially, Statlas uses billions of dollars in aggregate revenue to generate benchmarks within the eCommerce space. By using Statlas to measure your LTV, you can determine if your brand currently has a “good” LTV compared to other similar businesses.
Overall, a good LTV benchmark is a 30% increase in 60 days and a 100% increase within one year.
From there, you can use this information to create LTV-boosting strategies that grow your revenue in the long term. There are two main avenues we suggest taking when you’re ready to elevate your LTV.
Mining Customer Cohorts
Returning to your Shopify app and the customer cohorts option, you can fine-tune these analytics by filtering for a specific type of customer. Some of the most effective filters to use include:
First Order SKU
This filter will show you how the LTV varies depending on which product a customer ordered during their first purchase. For instance, a brand selling shampoos might learn that a customer who orders a bundle as their first product has a higher LTV than one who orders a single shampoo. This becomes an actional piece of data that the brand can use to adjust their marketing efforts for optimized LTV.
Seasons
Another good option is to look at the LTV for customers who ordered during a specific time of year. This allows you to compare your normal customer LTV against those who ordered during a holiday or special offer period, so you can analyze the effectiveness of those marketing campaigns.
Offers & Angles
If you’ve tried running special offers like a BOGO sale or other limited-time deals, you can also use this tool to assess whether any particular angle yielded a stronger LTV than the others, giving you the power to build strategic campaigns around this insight in the near future.
You can also use this same method for specific angles or value propositions that you used in your ads. For instance, if a coffee brand ran two different ad campaigns, with one focused on reducing acidity in the gut and another on increased energy, they could use this information to see which angle produced the strongest LTV for their brand.
Audience Types
Last but definitely not least, you can use this tool to analyze which types of audiences produce the highest LTV for your business. Of course, this can include things like age ranges, locations, and other key demographics. However, we like to take this a step further by looking at some of the other unique characteristics that can help you better understand customer behavior.
When you look at this data, ask yourself key questions like…
“Did these customers purchase during a particular holiday period?”
“Were they shopping for themselves or buying a gift for someone else?”
“Did they use coupon codes during the checkout process?”
All of these questions help you paint a clear picture of your customer base and give you the insights you need to put more energy into the high-value customers that drive your LTV and less energy into the ones that don’t.
Facebook Bidding
Once you’ve had a chance to analyze the LTV numbers for all of these different categories, you can use the insights you’ve gained to fine-tune your bidding strategy on top eCommerce social media platforms like Facebook.
In other words, when you know who your most valuable customers are, you can funnel more bidding funds into the angles, offers, and SKUs that have proven to produce a higher LTV for these target customers.
For more insight on how to use Facebook bidding to your advantage, check out our previous blog on that topic: [link]
LTV: Why It’s The DNA Of Your Product
Now, there is one crucial aspect of LTV that is difficult to escape, no matter how great of a marketing strategy you have. The fact of the matter is that some types or products intrinsically have a higher LTV, while others require much more time and effort to produce similar results. We think of this as being the DNA of your product.
Here’s how we look at it…
Skincare products have a naturally high LTV because customers will continuously purchase these goods again and again, especially if they’re happy with the product and its results. These products have a high purchase frequency built into their DNA, giving them an advantage over products that don’t need to be repurchased as often.
Another example of a product with naturally high LTV is luxury fashion. Even though these products don’t need to be purchased frequently, they have an intrinsically high LTV because they consistently release limited edition items, creating a sense of FOMO amongst their loyal customers that keeps them coming back for more.
So, what should you do if your product has a naturally high LTV but you still aren’t seeing the same results as your competitors?
In this scenario, you need to get really honest with yourself really quickly and determine which factors are bringing down the value of your product.
For example, if you have a skincare brand and your LTV isn’t where it should be, you should start asking yourself questions like…
“Does the product work like it’s supposed to?”
“Does it smell strange?”
“Is the packaging too bulky?”
All of these factors can cause customers to abandon your brand after their very first purchase and will need to be addressed before you can improve your LTV.
How To Use Cohort-Based LTV Forecasting
As we’ve mentioned, LTV is an essential tool for creating an accurate revenue forecast. We like to do this by breaking our total revenue down into two primary customer segments.
New Customer Revenue
This is the amount of revenue produced by customers who are buying from your Shopify store for the first time. Typically, this revenue is more difficult to forecast since this can vary greatly from one month to another. You can create an estimate for your new customer revenue by looking at the total number of orders placed by first-time buyers during the average month and using that to build a benchmark.
Existing Customer Revenue
This is where your Shopify customer lifetime value comes into play. If you know your LTV, you can accurately forecast the amount of money produced by returning customers during any given time frame. This is why maintaining good customer relationships is so important to the long-term viability of your brand since the number of unique customers who repeatedly purchase from your store is the most reliable source of income your business can have.
With the total customers from these two segments in place, you can generate a reliable revenue forecast based on your LTV analysis. This gives you the freedom to make strategic decisions about your ad spend, marketing tactics, and more.
Analyzing What You Need To Fix In Your LTV
Now, most of this insight doesn’t matter if you don’t have a good customer lifetime value to begin with. That’s why being about to analyze the things that need to be fixed in your LTV is a must.
As we’ve mentioned, some products have a naturally higher value over the average customer lifespan than others. If you’re selling products that should have a high LTV but don’t, you need to start looking at what things might discourage your customers from repurchasing the product.
You can achieve this by sending out customer surveys or even setting up interviews with customers who are on your email list but haven’t purchased from you recently. With this intel, you can start to have a better understanding of what parts of your product need to be improved in order for your customers to increase their purchase frequency.
On the other hand, if you’re selling a product that doesn’t have a high LTV embedded into its DNA, there are still some strategies you can use to improve this metric. Ultimately, having a high LTV is a sign that your customers really love what you’re selling. So, if you believe that you have an amazing product, you can use this enthusiasm to drive your LTV up.
The first step to take is to ensure that your LTV is within the cash conversion cycle of your business. If it’s not, you can fix this by encouraging your customers to buy more often with these strategies:
Subscriptions
For products that consumers regularly use, offering subscriptions is an easy way to increase the customer’s lifetime value by charging them on a monthly or bi-monthly basis for the products they already know and love. This produces a guaranteed source of income and keeps your LTV moving upward.
Cheaper Debt
Source:- https://www.wayflyer.com/
If you want to reduce the length of your cash conversion cycle altogether, you can look into taking out cheaper business debts, including lower interest rates on any investments that factor into your cash flow.
Product Drops
Exclusive product drops are another good way to improve LTV, especially when used within your customer loyalty programs. Giving existing customers early access to new releases, as well as limited-edition versions of products they already love, keeps them engaged and invested in your brand.
Next, once your LTV is within the cash conversion cycle, you can improve the average purchase value of your returning customers using a few simple strategies. Some of our go-to methods include:
Bundling
Accounting For Churn
Churn, or the rate at which customers stop interacting with your brand, is also a big factor in customer lifetime value. Most of the time, a high churn rate is due to poor customer service, bad website functionality, and other non-product-related issues. If you have a great product but notice your customers seem to fall off after a few orders, you may need to address these aspects of your business.
Upselling & Cross-Selling
Instead of creating bundles of products, you can either upsell your existing customers on a higher-value version of the product they’re already buying or cross-sell them on a similar item during this checkout process. This helps increase your AOV and your LTV simultaneously.
Find Support For Your LTV Goals
Shopify customer lifetime value is one of the most underutilized yet incredibly beneficial metrics that eCommerce businesses have at their disposal. If you need more insight into achieving your LTV goals, connect with a member of our team today.