How to Track the Lifetime Value of Your eCommerce Customers

Operating a successful eCommerce business requires tracking and understanding a range of crucial KPIs, so you fully understand the effectiveness of your efforts. 

However, you’ll often have to dive deeper to find some KPIs to understand how they reflect your eCommerce business. One of these metrics is Lifetime Value (LTV), a KPI that shows the long-term value of every new customer acquisition. 

Keep reading to learn everything you need to know about LTV and how to improve it to power sustained growth for your eCommerce business.

What Exactly is Lifetime Value?

Lifetime Value describes the revenue a customer contributes to your business. Beyond revenue, LTV is a reflection of customer satisfaction, your product's value, and your brand's overall viability.

LTV has an essential relationship with Customer Acquisition Costs (CAC) — if your LTV is lower than CAC, you’re spending more to convert them than they generate in the long term. Understanding and tracking the relationship between these KPIs helps maximize the revenue your investments generate in acquiring customers.

To truly understand your LTV, you’ll need to gather vital metrics, run calculations, and translate the results into actionable feedback about your business. It’s not quite as straightforward as other eCommerce benchmarks, but measuring and tracking your LTV is worth the effort.

Learning how to track the lifetime value of your customers helps identify specific ways to provide more value to your customers to keep them coming back. But before we dive into tracking, analyzing, and improving your LTV — what should you aim for?

What’s an Ideal LTV? 

So what should you be striving for? One study found that eCommerce's average customer lifetime value is $168 for direct-to-consumer businesses. 

However, that statistic is a rough ballpark that doesn’t apply directly to every industry, especially eCommerce businesses with high-value items or subscription services.

It’s crucial to evaluate your metrics in relation to your competitors. Fortunately, Varos gives you the tools to calculate both your own LTV and your peers' LTVs. 

Varos sheds light on industry-specific metrics that you can use to calculate LTVs to understand how you’re performing, such as repeating order ratio:

Metrics You Need to Know Before Calculating Customer Lifetime Value

Calculating your LTV begins by gathering the specific metrics you’ll use in the LTV formula. Some of these metrics are readily available, while others require using their own formula. It’s well worth taking the time to track your LTV to improve your business; let’s discuss what you’ll need.

Average Revenue Per User

Average Revenue Per User (ARPU) = Revenue in the chosen period / total number of customers in the same period

The resulting ARPU describes the average revenue per customer during the period in question, which may be anywhere from a day to a year, depending on your needs. Remember to use the same period for the rest of the metrics.

Retention Rate

Retention Rate = Existing customers in current period / total customers in last period

By comparing two consecutive periods, your retention rate helps you understand if you’ve gained or lost customers. Use the same timespan for both periods, such as comparing the last month to the month before it.

Retention rate, and the LTV formula that uses it, are better suited for subscription-based eCommerce sites than more traditional stores. This added value is because a subscription model relies on having strong retention to generate revenue and drive growth.

Churn Rate

Churn Rate = (users at the beginning of period - users at end of period)  / users at the beginning of period 

You can consider churning the opposite of retention; it describes how many customers you lose in a given period. The most basic LTV formula uses churn to describe how much you earned from a customer before they left.

Addition Metrics You’ll Need

The above metrics often require using their respective formulas. However, other metrics will be readily available that you’ll need depending on the LTV formula you use, which are:

‍Average Order Value: This metric is typically available within your eCommerce dashboard and demonstrates how much a customer spends when they check out, regardless of new or returning customers. 

• Purchase Frequency: How is a customer returning for more? Varos helps you track this statistic, which will likely be available from your eCommerce platform.
• Average Gross Margin per Customer: This metric demonstrates how much profit a customer generates per sale. It’s similar to AOV, but focuses on profit rather than overall value.

So, How Do You Calculate Customer Lifetime Value?

Now we’re ready to explore the eCommerce LTV calculation formula. One commonly used basic LTV formula is:

‍LTV = ARPU / Customer Churn Rate

The above formula is a valuable descriptor of how much revenue a customer generates by considering the end of their time as a customer.

However, another more detailed LTV formula is:

‍LTV = Average gross margin per customer X (retention rate / 1 + rate of discount - retention rate)

This formula takes a different approach and considers the average profit of the customers you’ve retained in the given period. Take note that the ‘rate of discount’ refers to the interest rate you would implement in a discounted cash flow.

One final way to calculate LTV is by leveraging Average Order Value and Purchase Frequency with the following formula:

‍LTV = Average Order Value x Purchase Frequency

This relatively straightforward formula simply considers how frequently a customer makes a purchase and how much that purchase is worth.

Varos makes understanding your purchase frequency straightforward and demonstrates how you compare to your peers:

How Do You Track the Lifetime Value of Your Customers?

You now know how to calculate your LTV, but just like other KPIs, it’s not frozen in time. Instead, it captures a snapshot of results based on the period.

It’s essential to calculate and track lifetime value on an ongoing basis. You may be able to do this within one of the platforms you already use, but even using a spreadsheet is better than not tracking it at all.

Tracking and evaluating the differences in your LTV helps you understand the impact of your efforts to acquire customers, keep them coming back, and increase how much they spend. Without LTV, you won’t have the entire picture of how well your store is performing in the long term and may end up spending too much on finding new customers rather than retaining them.

Why Does Tracking eCommerce LTV Matter?

Let’s dive a little deeper into why calculating and measuring LTV is essential for the sustained success of your eCommerce business.

‍Help drive repeats sales: Repeat business means you’re generating revenue without needing to invest in marketing campaigns and focusing on initial conversion rates. Instead, LTV highlights how well you retain customers so you can keep returning them.

• Understand brand perception: A strong and increasing LTV indicates your customers view your brand positively, while a declining LTV showcases the opposite. Tracking your LTV helps you understand the overall experience of being your customers, which can be further informed with customer support metrics, survey results, and net promoter scores.
• Reduce customer acquisition costs: Tracking your LTV helps put your Customer Acquisition Costs (CAC) in a long-term context. You’ll be able to see how your initial investment in CAC translates to lasting revenue for your company. From there, you can make changes to either reduce CAC or enhance LTV — ideally, both.

Each of your eCommerce metrics sheds light on essential areas of your business, such as the ease of use of your shopping cart, the effectiveness of your marketing campaigns, or the quality of your customer support. Start measuring and tracking LTV to help focus your efforts on building repeat business and maximizing your CAC.

How to Improve the Lifetime Value of eCommerce Customers

How can you use LTV in marketing to drive sustained growth for your eCommerce business? Let’s review ways to keep customers around and encourage them to spend more at your store.

Boost your Average Order Value (AOV)

Average Order Value (AOV) is essential in how much revenue a single purchase generates for your business. There are several potent ways to improve your AOV, including:

Identify and eliminate anything in the purchase process that may cause frustration, such as an intuitive interface or unclear return policy

• Offer free shipping at a specific threshold to encourage customers to reach it
• Discover ways to upsell better products or cross-sell complimentary products.

Varos helps you understand your own AOV over time alongside your peers. If you’re falling behind, you can explore why others in your industry encourage customers to spend more. 

Launch a Loyalty Program

Loyalty programs encourage customers to return rather than go to the competition. There are many different ways to create and nurture a loyalty program. For example, you can give customers points for every dollar spent, set purchase tier thresholds for discounts, and even include a referral component for more rewards.

LTV is all about keeping customers happy and coming back, so a well-made loyalty program directly complements improving the lifetime value of your customers. You can also likely find an add-on or extension for your eCommerce platform to make launching a loyalty program easy.

Refine the Customer Experience

The experience your customers have during their initial purchase will strongly motivate whether they come back or go elsewhere when they need your product or service again. 

Evaluate the entire process of going from a marketing campaign to the final checkout page to identify any friction points that might make someone leave. But that’s not the end; consider your shipping speed, customer service teams, and return policy.

Examine every aspect of discovering your company to become a repeat customer and explore ways to make the process a more positive and stress-free experience.

Adopt Varos for Real-Time eCommerce KPI Benchmarks

Your average lifetime value may not be as easy to obtain as other metrics, but it’s well worth understanding what it is and how it can help improve your entire eCommerce business.

Now you have a strong understanding of how to find the KPIs you need and put them to work discovering your LTV. Then, you can make strategic changes to keep customers returning and buying your products or services.

Finding your LTV and understanding how you compare to your peers can be challenging. This KPI is not as readily available as many other metrics, so Varos makes it easy. The Varos dashboard shows you how well you’re performing — and how you stack up to the competition.

Ready to start using accurate benchmarks to gauge your eCommerce KPIs? Get started for free, or request a demo to see how our unique platform can help your business grow.\

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About the Author

Yarden Shaked

Co-founder & CEO at Varos

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