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What is Customer Lifetime Value and how to calculate it

Customer Lifetime Value or LTV or CLV is an incredibly valuable metric for your Shopify stores. It’s used to calculate the long term value of a customer.

How to calculate Customer Lifetime Value or LTV or CLV

Customer Lifetime Value is calculated by multiplying the Average Order Value by Number of purchase per year multiplied by the lifetime of the customer. Let’s take a simple example of $2 coffee. I buy a coffee every weekday, so for the coffee shop my LTV is:

How to calculate Customer Lifetime Value or LTV or CLV

Customer Lifetime Value is calculated by multiplying the Average Order Value by Number of purchase per year multiplied by the lifetime of the customer. Let’s take a simple example of $2 coffee. I buy a coffee every weekday, so for the coffee shop my LTV is:


$2 per cup x 52 weeks x 5 days a week = $520 spent on coffee per year

If I’m buying coffee for 5 years from the same coffee shop, my lifetime value would be

$520 per year x 5 years = $2600

This is what I am worth in that coffee shop’s books.

LTV identifies which customers are likely to be the most valuable over the long haul. The higher the LTV, the greater the possibility of them being with you for a long time.

Why is Customer Lifetime Value important?

Not all customers are the same. They vary in various ways. Some you acquired organically, for other you had to spent ad dollars. Some are new, some are old. Some differ in the frequency or volume of how much they order. In face, from Shopify’s estimate the top 1% of ecommerce customers are worth upto 18 times more than than average customers.

With customer acquisition costs getting higher and higher each year, it’s extremely important that you focus your efforts on acquiring the right customers, the customers who are easier to acquire and are worth more.

How to increase your Customer Lifetime Value or LTV?

In simple terms, your customer LTV is the total value of all their sale. So selling more will definitely improve your LTV. But rather than just any selling, this metric focuses on selling to the customers who have already bought from you. If you sell $500 worth of merchandise to 10 customers, your LTV is still $500, as that’s what one of your customer is worth. Where if you sell $4000 worth of merchandise to 2 of your high value customers, their LTV is ~$2000. So the key is to

Know who is more likely to buy more from you and help them buy more from you

Encourage your customers to spend more

If you want to treat your high value customers right, you have to make them feel special. Let them know that they are treated differently, some of the methods our high volume merchants continue to see results in are:

  • Better pricing/offers
  • Create scarcity
  • Add free shipping
  • Create urgency

Going to the next level with BYG Post purchase upsell offers

After interacting with Shopify merchants for years, we’ve come up with the perfect solution that helps you increase your Customer Lifetime Value. The best part? It runs on autopilot and once configured, can keep making you additional sales without you spending time on it every week. Here is how it works:

  1. You create your Post purchase campaigns using our eligibility criteria to target high value customers by their LTVeligibilty-criteria-for-post-purchase-offers
  2. You specify the offer for that customer segment.
  3. That’s it!

Now BYG‘s campaigns will keep on running and every time a high LTV (> $5200) customer places an order, they will get their special offer created just for them! Also when other customers buy more and graduate to that LTV, they will automatically start seeing those VIP offers! without you ever have to change anything!

BYG is now live on the Shopify App Store and we are onboarding the first 50 stores for free! Once we’ve received 50 stores, we’d change to paid only plans. But existing stores will be grandfathered and will get the free subscription for life!

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What is Average Order Value or AOV in Shopify

Average Order Value (AOV) is the average total of every order placed with your
store over a defined period of time. AOV is one of the most important metrics
for your Shopify store to be aware of, the higher the average order value, the
more profitable your business is.

How to calculate Average Order Value (AOV)

Average Order Value is calculated by dividing the total revenue by the number of orders in a given period. For example, if you store made $50,000 and you had a total of 1000 orders in a month. So your AOV for that month would be 50000/1000 = $50.

How to increase Average Order Value (AOV) for Shopify stores

AOV is a very important metric but might not be the only way to calculate an average. From our example, a $50 AOV might be spread in various customer segments. And all those customers can not and should not be treated the same. One technique that has worked great for our merchants is segment customers into multiple groups based on their purchase history. Many stores split their customers into 3 segments(Low, Medium, and High spenders), while other segment focus on frequency of orders.

Once you have similar customers grouped/segmented together, you can figure out what works best for them. Here is an example for reference purpose:

  • First time buyers: Discounts, offers, bundles, how to guides etc.
  • Regular buyers: New launches, membership plan, subscription etc.
  • More frequent: Free shipping, bonus gift, birthday, anniversary offers etc.

Here are actionable ideas you can implement to your Shopify store to increase your AOV:

1. Free shipping

https://apps.shopify.com/upsellprogressbar

Your customers love free shipping. And they all expect it. Free shipping progress bar is a great way to nudge your customers to add more to their carts and increase your AOV.

2. Bundles – Frequently Bought Together

https://apps.shopify.com/frequently-bought-together

Also known as cross sell. It’s when you recommend another product to a customer based on a product they have in their cart. It might be an accessory, refill or anything that complements the current product in their cart. Our merchants have nothing but nice things to say about this Frequently Bought Together app from CodeBlackBelt.

3. Post purchase upsell offer

https://apps.shopify.com/post-purchase-offers-2

Post purchase upsell offers are the most effective method to increase your AOV without distracting popups or expensive ads. All our data shows it works best since the offer is:

  • Relevant: Based on their purchase and not just ATC (Add to cart)
  • Convenient: When an offer is accepted, it can be clubbed in the same order, without the customer having to enter their payment/shipping details again
  • Impactful: Since it creates an urgency for the customer to accept or loose that offer.

4. Threshold Discounts

Threshold discounts

Similar to free shipping bar, this method also nudges your customer to the next milestone. An example usage would be to offer them a discount of 10% but with a minimum purchase of $100. You can get step by step instructions on how to create a threshold discounts on this Shopify manual

How to access the AOV metric on Shopify

To access your Shopify store’s Average Order Value, you can follow the below steps:

  1. Go to your Shopify admin
  2. From the sidebar click on Analytics
  3. You should see your store’s AOV in the 5th card
  4. You can click on View report to get your detailed AOV

Wrapping up

Average order value or AOV is the average amount your store is making per order. The higher your AOV, the better your business is doing. While Shopify provides you with excellent tools to manage your store and track your store analytics including AOV. BYG provides you with all the building blocks to increase your AOV for your Shopify store

We are offering a free subscription to our first 50 signups.