3 surprising facts about customer lifetime value

The mantra in sales, no matter what industry you’re in, is that the customer is king (or queen). And lately, that’s considered not just the customer in the current moment — it’s the customer over the entire course of their time period interacting with you as a retailer. When it comes to capitalizing on your marketing efforts for the best profitability, the customers with high “lifetime value” are gold.

What is customer lifetime value?

Customer lifetime value — CLV for short — is the estimated total amount of money an average customer spends on products or services during the entire relationship. In a practical sense, this important metric can only be a rough projection, but it’s a compelling value calculation nonetheless.

How do you calculate the estimated lifetime value of a customer? You average out their typical purchase amounts over the length of time you expect to keep them as a customer.

$2K or $15K?

For example, let’s say you’re an ecommerce business that sells furniture and appliances. Your customers don’t buy your big-ticket items very often, but they typically return from time to time to do some online shopping, like when they need to search for a new refrigerator.

With this repeat-business customer behavior pattern, let’s say your average customer spends $2,000 per purchase on your site. If they buy something from your ecommerce store once but aren’t wowed by the experience, and then go elsewhere for the foreseeable future, their short-term customer value is marginal.

But let’s assume you’re good at first-time customer retention. You offer a modern user experience; a customer journey free of pain points. You do personalized email marketing and provide incentives to your valuable customers to come back and browse. Feeling good about you as their go-to store, these shoppers become loyal and buy a big-ticket item every other year for 10 years — an average customer lifespan.

If you expect them to buy a refrigerator from you once every five years, you know a fridge costs about $2,000, and you expect its price to go up 10% every five years, you can calculate roughly how much a customer would spend over the course of a 30-year relationship: $15,431.

That’s significant compared with a single $2,000 purchase, and the upside could be much higher. For example, every one of your happy refrigerator buyers could then spread the word to their friends, some of whom could then buy from you, plus generate even more referrals.

Forecasting your CLV like this can put you in the right mindset, the one focused on retaining customers. It’s not so much about calculating an exact amount; it’s about seeing the prospective upside and aligning your current decisions and actions in a way that ultimately gets you closer to great results.

Surprising CLV facts

Who knew CLV could be so important in terms of investment optimization? If you’re intrigued, here are three eye-opening data points on CLV:

1. Investing in new customers is much more costly than retaining existing customers.

Clearly, it’s easier to sell something to your existing customer base. Experts estimate that it’s at least 5% more costly — or possibly much more expensive — to retain an existing customer.

This drives home the fact that the optimal thing to do, while of course not ignoring your new prospects, is to focus feverishly on retaining the customers you’ve got right now. In this rapidly evolving retail landscape, if you want to improve your CLV, paying dedicated attention to the people who’ve already shown that they’re willing to give you their money makes total sense. After all, your most loyal customers already like and trust you, so they’re likely to be receptive to your efforts to reach out to them.

2. After a personalized shopping experience, 60% of people are likely to become repeat buyers.

Personalization tactics have been winning over customers en masse. Not surprisingly, people sit up and take notice when you pay attention to their needs and make their shopping life easier with an enjoyable customer experience. They clearly like (often love) retailers’ personalization efforts. And the popularity of personalization seems to be only increasing thanks to artificial intelligence. And not only do people feel good about personalization, they’re receptive to marketers’ recommendations and efforts to engage them. They’re likely to return the good feelings they’re garnering by buying, and then, if they’re still happy, continuing to buy.

3. Companies using advanced personalization report a $20 return for every dollar spent.

That really moves the needle. Smart personalization applied in real time can significantly raise your ROI and CLV. Sounds like a wake-up call for a business to turn its attention to personalization, right?

Given the importance of cultivating CLV, here’s something else rather surprising: some major online brands aren’t doing everything in their power to improve their CLV. In some cases, such as with consumer-friendly policies for return shipping, the trend is going the other way. So by addressing this head on, you could gain a distinct advantage over some competitors that aren’t focused on boosting CLV.

How can you improve your CLV?

Offering great customer service, creating a consistent omnichannel experience for your shoppers, making things super easy for mobile users: these efforts are at the heart of building strong CLV. You’re probably already considering ways to improve in those areas, so let’s look at some underrated ways you can win shoppers over for a long purchasing life that translates into stunning CLV.

How to increase customer lifetime value

Here are two ways to delight your shoppers and win them over for good:

Make returns free and easy

Let customers return something only if they pay out of pocket to ship it back. Annoy them with this downer policy and make them wonder whether they should buy something from you ever again. Call your reputation into question when these disgruntled people post reviews about your “deplorable” return policy on social media.

These aren’t the type of brand advocates you want to cultivate. Of course you don’t want to damage your customer relationships! There’s no upside to destroying customer trust.

Instead, you could decide to be like Zappos, an online store that makes it supremely easy for customers to return items at no charge.

Did you know that offering free returns to online-store shoppers can not only satisfy customers but make them feel comfortable buying even more? That’s what Zappos’s management discovered: their buyers who make the most returns turn out to be the most profitable for the company.

Why is this the case? It goes back to customer trust. Shoppers who know they’ll be taken care of feel comfortable taking risks. That means making them feel good about any needed returns could strengthen, not deplete, your bottom line, and in the process inflate your CLV.

Personalize with enticing recommendations

On-target recommendations are one particularly potent form of ecommerce personalization. They enhance the online browsing and shopping experience, making each individual feel like their customer needs have been understood. When people are shown what they want (chocolate?), there’s a good chance they’ll head straight to checkout, sending your conversion rates up.

Amazon.com is, as always, a shining example of meeting customer expectations and building customer loyalty. Its product recommendation engine generates 35% of its revenue.

How can you offer shoppers personalized experiences and recommendations that resonate? One proven way to offer a better customer experience is to upsell and cross-sell individual customers with AI-aided suggestions. Using customer data like clicks and browsing history, artificial intelligence can analyze your users’ behavior and preferences and produce highly personalized suggestions.

What constitutes a promising product recommendation?

• A suggestion aligned with something the person has bought
• A recommendation for an item that customers who are similar to them have bought
• A cross-sell — suggesting something related to what they’ve already bought
• An upsell — a suggestion of an upgraded or more expensive version

Well-targeted recommendations contribute to customer engagement and overall customer satisfaction, which can naturally impact CLV. Plus, this practice can be continually refined, letting you capture shoppers’ up-to-date interests and respond with the right suggestions.

Build compelling CLV

Want to improve your customer lifetime value? Algolia’s smart personalized recommendations can help you optimize your search and discovery features to create this reality. Let’s chat about how you can give shoppers surprisingly rewarding personalization and recommendations that resonate.