Understanding customer lifetime value (CLV)

- There are two very important numbers in ecommerce. As we've discussed, the cost of acquisition, or CoA, refers to the cost of getting someone to make a purchase. Once you start getting customers, you will want to focus on CLV, or customer lifetime value. The CLV is an estimate for how much profit you will make from each customer. To have a profitable business, you will want to lower your acquisition costs and increase your customer lifetime value. If your CLV is higher than your CoA, you're more likely to be profitable. To determine your CLV, we first need to calculate CoA.

CoA is calculated by dividing the cost per visit by your conversion rate. Let's say you're selling a chocolate flavored protein bar, and you've decided that advertising is the best way to get your business moving. If you pay $1.00 a click, and have a 20% conversion rate, that means one out of five people that click on an ad actually go through the checkout process. Your acquisition cost in this case is $5.00. That means for you just to break even, you need $5.00 profit per order. That might sound challenging if you're selling protein bars.

If a customer places an order, and you make $2.00 in profit, you're gonna be losing money. This is when increasing the customer lifetime value becomes important. Each industry is gonna be very different in terms of how they increase CLV, but there are several good strategies that you can employ. By offering a variety pack of protein bars, you might convince customers to buy more product. That could change your CLV from $2.00 to $10.00. You could send newsletters out reminding people to come back. If you have a 20% conversion rate on your newsletter, you've just increased your CLV to $12.00.

While the customers are browsing your store, you could entice them with related products, like mineral water or supplements. Even a small conversion rate on a $30.00 supplement would raise the CLV yet again. These are very simplistic numbers, but they demonstrate the idea behind raising the customer lifetime value. Now we're really starting to pull in some serious revenue, but you can easily see how increasing the CLV and lowering the CoA are two major fundamentals of ecommerce.