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:

$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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