Customer Lifetime Value (CLV): How do you measure success?
Imagine that a customer walked into your store and spent $100. A few minutes later, another customer comes in and spends $500.
Of these two customers, which is more valuable to your business?
At face value, it’s easy to choose the latter. After all, they just spent $500 while the other only spent $100, right?
This is what happens when you don’t measure the value of their customers over the entire span of their relationship.
You have no real sense of how customer buying behavior is changing over time, or even how long a customer typically sticks with your business. This is a massive disadvantage, considering that an existing customer is around 40-50% easier to convert than a new customer. This makes Customer Lifetime Value is one of the most important metrics for your ecommerce business to track.
But here’s the thing; even those that are doing it are probably doing it wrong.
What is Customer Lifetime Value?
Put simply, Customer Life Value (CLV) is a measure of how much a customer spends throughout their relationship with you. There are a variety of ways to calculate CLV, though this is the most common:
Av. order Value (AOV) X av. number of orders per year x av. length of relationship
So, if the average customer has an AOV of $70 and places an average of 8 orders per year for 6 years, your CLV would be:
$70 X 8 X 6 = $3360
CLV is an important measure of success in that it forces merchants to take a long-term view of their customer relationships. It puts vanity metrics like customer acquisition into context by showing how much your initial Customer Acquisition Cost (CAC) generates over time.
But the problem with this approach to CLV is that it doesn’t take into account the numerous other ways that customers can add value to your business.
For example, you might have a customer who purchases from you infrequently and at a low AOV. Using the above calculation, it’s easy to say that their CLV is low.
But what if that customer was also one of your brand’s biggest advocates on social media, or regularly provides insightful answers in your customer surveys? This makes them immensely valuable to your business. Yet these behaviors fall outside the scope of how CLV is measured.
This example reveals why conventional approaches to CLV are no longer fit for purpose. In 2021 the ecommerce marketplace is driven by a plurality of different brand interactions, and actual transactions are often in the minority. By excluding these from your CLV measurements, it’s impossible to get the full picture of how your customers are providing value.
The most successful D2C brands out there are those who’ve built brand loyalty by harnessing the power of these interactions - keeping their customers in a closed loop of browsing and purchasing.
Glossier: The master of social commerce
When Glossier first started making headlines, everyone wanted to know how the emerging brand had so suddenly become a cult-like favorite. Consumers weren’t just buying a single product, but building their very own Glossier catalogs inside their bathroom cabinets - a feat that no single cosmetics brand has achieved so readily.
So, how was it possible for an online-only brand to gain such a dedicated global following when they didn’t even have store locations? Their flagship store in New York City didn’t open until 2018 - four years after the brand launched.
The answer is two-fold. Glossier bucked the prevailing trend in cosmetics by making its product catalog almost deceptively simple. Offerings like face mist and moisturizer were designed as ‘cornerstone’ products to appeal to a broad range of beauty consumers - without actually needing to be tried in advance of purchasing.
But more importantly, Glossier has elevated the concept of social commerce to a whole new level. Its social media accounts are a carefully curated mash-up of slick product photography, bathroom selfies, and screengrabs of what users have to say about their favorite beauty brand. They make a clear effort to answer their follower’s questions, provide advice, and reward users with a coveted spot on their feed:
In sum, Glossier doesn’t approach Customer Lifetime Value from the standpoint of sales alone. It’s within these hallowed social media feeds that Glossier discovers what devotees think about new products, gets ideas for new offerings, and encourages them to share their @glossier stories to keep spreading the word.
"I want to foster a real dialogue with Glossier," said Founder Emily Weiss back in 2014. "If we sold through a department store or mass retailer, that would be more difficult to do. Conversations are so important to building the Glossier community."
By prioritizing social commerce, Glossier has built an iconic brand that positions the role of the customer as brand advocates, social media managers, and even product developers. In sum, they’ve helped to expand CLV beyond a cold focus on sales activity.
The big takeaway here? In a digital ecosystem where consumers and brands can talk to each other seamlessly, the scope for measuring CLV is limited only by how much your business invests in creating an enjoyable customer experience.
Or, as they may say in Matrix, there is no spoon.