The Correct Method For Tracking Customer Lifetime Value

It cost 5 times more to get a new customer to purchase from you than to get existing ones to purchase again. Tracking the customer lifetime value, CLV, of your existing customers is essential for tracking recurring purchases and growing you business.

By tracking the customer lifetime value of your customers you can see how successful you are at converting existing customers to second or even third purchases.

An added benefit of increasing your customer lifetime value is the effect on new customer acquisition costs. By increasing your customer lifetime value you can afford to spend more on your Facebook ad campaigns.

Finally, by defining our window to measure customer lifetime value we can set short term, medium, and long term cash flow goals.

What Is Customer Lifetime Value?

Customer lifetime value can be defined as the total revenue amount your company can expect to receive during a set window of time. This could be 60 days, 1 year, or 3 years.

How To Find Your Customer Lifetime Value

The customer lifetime value formula is:

Customer lifetime value = Average Order Value X Average Purchase Frequency.

Where...

Average Order Value = Total Revenue / Total Orders

Average Purchase Frequency Rate = Number of orders / Number of unique orders.

Finally, you can measure customer lifetime value for your window by multiplying by the average customer lifespan. The average for eCommerce is 2-3 years.

How To Pull Customer Lifetime Value

For our conversation, I'm going to assume you are using both Shopify and Google Analytics. At the end of the day you should have something that looks like the below.

If you would like to follow along you can download the following tracking sheet.

Tip: Make sure to select the same window of time whenever you pull data otherwise your numbers may not line up.

Step 1: Find Your Average Order Value

Average Order Value = Total Revenue / Orders

Below we can see the total revenue in our window for Shopify. Plus to the right, you can view our total orders.

By taking our total revenue for this time frame of $8,033 and dividing by 56, our order total we now have our AOV.

Step 2: Finding Average Purchase Frequency Rate

Average Purchase Frequency Rate refers to how often someone is purchasing within your window. If you are looking at a window of 1 year, the average APF is around 1.3-1.4 depending on your industry.

To find our APF using Shopify. We can take our total number of purchases, which we already pulled for AOV, and divide it by our total orders during that window.

To do this we go to Reports -> Customer -> Customer Reports Over Time

Once we are here we make sure to have the right date range selected then select edit columns and add in customer email.

We then export the data into a CSV. Then copy and paste to Google sheets

Once you have your data in google sheets. Select the email column -> select the data tab -> data clean up -> remove duplicates.

Finally, scroll down and see how many total rows you have left with one purchase in it.

Congrats! You have your unique purchases from Shopify. A little bit of work but worth it.

Now take your total purchases and divide that by the total unique customer you just calculated to get your APF.

In our example, we had 6500 total orders from 5000 total customers for an APF of 1.3.

Step 3: Determine Customer Lifetime Value

By multiplying AOV X APF we can find our customer lifetime value.

In our example at the beginning, we had a $153.85 AOV X a 1.3 APF which got us a $200 customer lifetime value.

Why is Customer Lifetime Value Important

We know how to calculate customer lifetime value... Great! Why is this number important?

Customer Lifetime Value Tells Your Predictive Expected Cash Flow From New Customers

Knowing your predictive customer lifetime value is fantastic as you can base future cash flows on the present value of the new customer and where they are in the customer journey.

For example, if you know the average customer lifetime value is $100 over a year and currently they have only purchased $25 of product from you. You can reasonably expect to see an on average an additional $75 from that customer within the year.

Customer Lifetime Value Impacts Customer Acquisition Cost

By knowing the lifetime value of your customers, you can better assess the costs of acquiring new customers. Some channels may have a higher lifetime value than other channels. On these channels, you can afford to spend more on customer acquisition costs.

To find calculate customer lifetime value within Google Analytics first create a new segment in Google Analytics. To do this select the plus button next to the all users segment.

Create the following segment.

Scrolling down you will now see all users and your unique customers by channel. You should now have everything you need to make your customer lifetime value calculations.

Looking into Google Analytics -> Acquisition -> All Traffic -> Channel Report, you see that the customer's lifetime value is higher for those in your SMS channel compared to the email channel.

In order to increase customer lifetime value, a reasonable step could be to create a sales funnel to move your email list into your SMS list or just gather more SMS numbers.

If you're not tracking customer lifetime value, you're missing out on valuable data that could help you grow your business. Start tracking customer lifetime value today to get a better understanding of your customers and how to keep them coming back for more.

Calculating Customer Lifetime Within A 60 Day Window

Using lifetime value as a metric is only as relevant as the window you track it in. For example, let's say you are looking into tracking the lifetime value of your customers over 3 years.

If your average customer value after 3 years is $750 great! But you may find that you do not have enough cash to go out and acquire new customers for the next 3 years until that $750 reaches you.

This is why I recommend looking at a historical customer lifetime value within a window of 60 days. By improving customer retention within 60 days you realize your cash faster and can scale more sustainably than looking at a 3-year horizon.

As a benchmark, we want the average purchase value within 60 days to be around 20% of the first purchase. So if we have an AOV of $100 we are looking for a second purchase(s) of $20.

Looking At Average Lifetime Value By Customer Segments

Does Customer Loyalty Affect The Customer Value

Looking at customer lifetime value by loyal customers is important for several reasons.

First, by creating a segment of your most loyal customers. You can compare the effects of your customer retention efforts against your general list. Hopefully, you find that the average customer lifetime value in your loyalty program is higher than your general list.

If this is the case. You should start looking for ways to convert your general email list to your loyalty program. Product launches, loyalty points, giveaways, community events, special newsletters, etc are some ideas you can use to promote your loyalty program.

Second, it helps to identify which customers are most likely to continue doing business with the company in the future.

By looking at customer lifetime value by loyal customers, companies can make more informed decisions about where to focus their marketing efforts and how to best retain their best customers.

Where Do Your High-Value Customers Come From

You probably have a list of high customer lifetime value customers. If you don't you should create this.

One way you can do this in Shopify is by going to the Customer tab on the left. Select predicted spend tier = High.

This will create your high-value customer list.

To find out the lifetime value of this list you can export it to a CSV and move it to Google sheets (personal preference).

From there you have all the data you need to find your Total Revenue, # of orders, and # of unique customers. This will give you your AOV APF and customer lifetime value.

Customer Lifetime Value (CLV) Provides Direction On Marketing And Sales Activities.

Ultimately, every eCommerce business should be tracking its customer's lifetime value. By doing so you gain insight into high-value customers and direction on where to place your money and efforts.

If you would like me to help you do this analysis for you business. You can schedule a call with me below.

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