For every Shopify store owner, grasping the intricacies of customer retention and acquisition is not just beneficial—it’s crucial for long-term success. At the heart of this understanding lies the concept of Customer Lifetime Value (LTV), a key metric that quantifies what a customer is worth to your business throughout their entire relationship with you. This guide aims to demystify the process of calculating LTV on Shopify and explore its critical relationship with customer acquisition cost (CAC).
What is Shopify LTV?
In the realm of e-commerce, LTV transcends the traditional measure of single transaction values. It represents the total revenue a customer is expected to generate during their tenure with your business. This metric takes into account the average purchasing behaviors, offering a more nuanced and comprehensive perspective than mere per-transaction analysis.
How to Calculate Shopify LTV
The journey to calculating LTV involves understanding three fundamental components: the average amount spent per purchase, the frequency of purchases, and the overall duration of the customer’s relationship with your business, often referred to as the customer lifespan. When combined, these elements paint a detailed picture of customer value, providing invaluable insights into the health and potential of your business.
Does Shopify Show LTV?
While Shopify doesn’t explicitly show LTV, it provides all the tools you need to calculate it yourself or use an app like By the Numbers to obtain it. The most common formula for LTV is:
LTV = AOV x Average customer lifespan x Average purchase frequency
However, a more complex formula that yields better results is:
LTV = ( Current Customer Value ) + ( Future Estimated Customer Value )
More specifically:
LTV = ( Total Sales ) + ( (Average Order Value) * (Median Number of Orders) * (Average Tenure – Current Tenure) )
The Benefits of Calculating your LTV in Shopify
Armed with LTV insights, you can make strategic decisions about allocating your marketing budget. This knowledge allows for effective segmentation by marketing channels, enabling you to invest in avenues that offer the most substantial returns. Understanding LTV also helps in setting benchmarks for assessing the effectiveness of your marketing strategies and in prioritizing areas of your business that need more focus. Moreover, comparing LTV with CAC offers a clear picture of the ROI of your marketing initiatives.
Automating LTV Calculation with By the Numbers
By the Numbers simplifies LTV calculation in Shopify. This app provides accurate data on customer lifetime value, Cohort Retention rates, and Product Repurchase rates, supporting informed, data-driven decisions for optimizing business performance.
Starting with Customer Lifetime Value
The primary objective of calculating LTV is to determine the complete value of a customer cohort. This is a significant factor as it enables you to compute the Return on Investment (ROI) of the marketing campaigns utilized to acquire the customers in question.
After obtaining the ROI, you can compare it with other marketing campaigns to determine which one is more effective or monitor it over time to keep track of changes.
Here’s how you can begin tracking LTV with the help of By the Numbers:
1. To access the LTV report, navigate to the left-side menu and select LTV.
The report should then be displayed on your screen:
This report provides you with several crucial pieces of information, including:
- Monthly Cohort: A group of customers who made their first purchase in a particular month.
- LTV: (Current Value) + (Future Estimated Value)
- Actual Value: Total sales for this cohort to date.
- Predicted Value: Estimated future sales for this cohort.
- Customer Return Rate: The percentage of customers that returned within a specific timeframe.
- Average Lifespan: The expected average lifespan of a cohort in months.
- Average Order Value (AOV): The total sales divided by the number of orders.
- Order Frequency: The average number of orders placed by the cohort in a given month.
2. To view the Segments, go to the left-side menu and select Segments.
The menu for segments should now be visible on your screen:
In addition to the typical details of a Segment such as AOV and Order Frequency, we now provide the Average LTV. This metric indicates the amount of money that the average customer in that Segment is anticipated to spend with your store during their customer lifetime. Conversely, Customer Value shows you how much money the average customer in that Segment has spent with your store.
3. Click on the “View Customers” link under any segment to get a report that shows the customer’s data for that segment.
You should see something similar to this:
In addition to their total sales, customer details now include each individual customer’s LTV. The LTV represents the expected amount a customer will spend while total sales show how much they have already spent with your business.
4. Generate a custom Segment utilizing LTV
While generating a custom Segment, you can select LTV from the Filters dropdown. You should see something like this:
With this feature, you can now filter for customers who have a Total Lifetime Value (LTV) that is above or below a specific amount that you decide on.
5. click on “Loyalty” from the navigation menu on the left-hand side
A screen similar to this should appear:
Each loyalty square displays the LTV for the corresponding group of customers. This LTV value represents the average amount that the current group of customers is predicted to spend with your business.
Doubling Down on Your Best Performing Marketing Campaigns Based on LTV
After performing LTV cohort analysis and identifying the campaigns that show the most potential, it’s time to double down on those marketing efforts. By reallocating your marketing budget to campaigns that have a higher LTV, you can optimize your marketing spend and boost your ROI. Keep track of the performance of each campaign and adjust your strategy as necessary to make the most of your marketing efforts. By using LTV analysis to inform your marketing decisions, you can make data-driven decisions that lead to success.
Identifying and Increasing Unrealized Sales
In addition to analyzing past revenue, LTV cohort analysis can also help you predict future revenue. One of the most valuable metrics in the LTV report is the “Unrealized Sales” field, which represents the predicted future sales of a customer. By increasing customer retention and running targeted email marketing campaigns, you can boost this number and unlock a significant amount of revenue.
To increase retention, consider implementing loyalty programs or offering personalized recommendations based on past purchases. In terms of email marketing, try sending personalized product recommendations, abandoned cart reminders, and exclusive offers to your most valuable customers. By tailoring your email campaigns to each customer segment and using data to inform your strategy, you can increase customer engagement and unlock unrealized sales.
For more tips on improving customer retention and loyalty, check out our blog post on the topic.
The Benefits of Using By the Numbers for LTV Analysis
Leveraging the advanced LTV analysis provided by By the Numbers comes with numerous benefits, including:
- Precision targeting of marketing campaigns: By understanding the LTV of different customer segments, you can tailor your marketing messages and strategies to maximize engagement and profitability.
- Efficient allocation of marketing budget: Knowing the LTV of various customer cohorts enables you to optimize your marketing budget by focusing on the most valuable segments and avoiding overspending on less profitable ones.
- Informed pricing strategies: LTV analysis helps you set sustainable and profitable pricing for your products or services, ensuring long-term business success.
- Data-driven product development decisions: By understanding which customer segments have the highest LTV, you can make strategic decisions about which products or features to develop next to cater to their needs.
- Optimizing customer retention efforts: LTV insights allow you to prioritize customer retention activities for the most valuable segments, ensuring the highest ROI on your retention marketing initiatives.
Additionally, you can use customer segmentation data to personalize marketing campaigns and engage with your most valuable customers. By the Numbers allows you to export an email list of customers within a specific segment, enabling you to send targeted emails or create personalized marketing campaigns using platforms like Klaviyo.
Connecting Your Segments with Klaviyo
By the Numbers seamlessly integrates with Klaviyo, a popular email marketing platform designed for e-commerce. This integration allows you to sync your customer segments between By the Numbers and Klaviyo, enabling you to create highly targeted email campaigns tailored to specific customer groups. This integration can help you save time and ensure that your marketing campaigns are reaching the right people.
To connect By the Numbers segments with Klaviyo, you’ll need to create a By the Numbers account and a Klaviyo account. Once you’ve created both accounts, you can connect your By the Numbers account to your Klaviyo account by following the instructions in this By the Numbers help article: Klaviyo Integration.
Conclusion
Knowing your Shopify customers’ LTV is essential to make data-driven decisions and optimize your business performance. It’s important to know your Shopify customers’ LTV, and with By the Numbers, it’s easier than ever.
