Calculate CLV in the online store

CLV (customer lifetime value) or lifelong customer value is the volume of sales or the total profit that the client brings to the company during the time of cooperation (while buying products and services).

This indicator can be calculated based on customer CLV history data and forecasting of this indicator.

1. The historical CLV is the sum of all sales to one customer for the entire time of his cooperation with the company. It is calculated on the basis of current information on customer purchases.
2. Forecast CLV - calculated on the basis of the analysis of the customer's purchase history and forecasting its future behavior. The more purchases a customer makes, the more accurate the predicted CLV will be.

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Why is it important to track customer lifetime value?

CLV is one of the most important metrics in the arsenal of an online store, it helps:

1. Rate real ROI (return on investsments - return on investment)
   Tracking CLV will help you focus on the channels through which customers come in, which bring you the most sales. Estimating ROI based only on how much a customer bought for the first time can lead you to a wrong calculation of the effectiveness of the channels. For example, you can spend on attracting one client 500 rubles, and at the same time he will make the first purchase for 700 rubles. Focusing on these data, we can conclude that the channel is inefficient and the budget invested in the channel has not paid off. But if you follow the further fate of the client, you can see that he will continue to make purchases and the total turnover for his purchases can significantly exceed the budget that was spent on him.
   
   Information about your customers with the highest CLV (heroic customers) will allow you to understand this audience: from what sources they come, to learn their socio-demographic data and to use this information for targeting in advertising campaigns. In addition, it will help to bypass competitors who use only data on the cost of attracting a client for analytics.
   
   
2. Improve customer retention campaigns
   Marketing programs to retain customers (campaigns to ensure that the customer makes regular purchases in the store) should be evaluated not only by what income they brought at a time. It is necessary to analyze how the campaign influenced the change in the customer’s CLV segment to which it was directed. To calculate the CLV change, you will need customer history data and projected revenue to estimate changes relative to the campaign.
   
   
3. Create more efficient personalized messages
   CLV-based client segmentation allows you to create personalized messages for each of the groups. When segmentation is necessary to evaluate the interests of customers and offer them only those products that match their interests. For example, if a customer buys frequently and with a high average check, then he is more likely to buy a more expensive item. And if the client has not bought for a long time and the average check of the last purchase is small, then you need to remind him about yourself, tell about promotions and discounts in order to attract him to the purchase and thereby increase the CLV.
   
   
4. Understand customer behavior
   By dividing customers into groups, you can analyze what prompted them to make their first purchase (free delivery, sale, promotional code). Based on this data, you can try to entice your new visitors to the same behavior.
   
   
5. Improve customer support
   Using segmentation and CLV data, you will be able to pay particular attention to customers with high CLV who are asking you for help. Also, such customers are more likely to be surveyed and answer questions about your products and share their ideas.
   
   
6. Understand how your profits change
   Knowing CLV, you can predict an increase in online store profits with an increase in customer lifetime value.
   
   

How to calculate CLV?

The historical CLV is the sum of all sales to the client during his time of cooperation with the online store:

CLV = (sale1 + sale2 + sale3 + saleN) * gross margin

The calculation of CLV, taking into account the gross margin, allows you to find out the real profit that the client brings.

The predicted CLV is an estimate of how much profit a customer will bring during his life cycle and purchase time in your online store.
There are many complex examples of calculating the CLV, taking into account future discounts, but we will focus on one formula:



Where:
T = Average monthly transactions;
AOV = Average order value;
ALT = Average customer lifespan, in months (Average Customer Lifespan (in months));
AGM = Gross margin.

So, CLV allows you to find out how much profit your customer brings to your online store, and knowing this indicator you will be able to assess how your profit will increase with an increase in this indicator and thereby predict sales growth.