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CLTV vs. AOV: Why Customer Lifetime Value Wins

Key performance indicators are an important element of growing your business — learn why you should put customer lifetime value above other metrics.

When it comes to ecommerce, making data-driven decisions is key to growing revenue and building brand loyalty — but sometimes it can be difficult to know which metrics to watch closely. While there are several factors that you should keep an eye on, two major indicators of success are customer lifetime value (CLTV) and average order value (AOV).

Average Order Value

Average order value formula for ecommerce.

Average order value measures the average total of every order placed with a merchant over a period of time. It’s an essential KPI that gives merchants insight into customer buying patterns so they can adjust their business strategies. Using AOV, ecommerce businesses can make decisions on advertising spend, product pricing and special offers to bring in more money per order.

Customer Lifetime Value

RAO: Recurring Average Order, COGS: Cost of Goods Sold

On the other hand, customer lifetime value predicts the revenue earned throughout the course of each customer relationship. Since it’s a prediction of future revenue, it’s not as set in stone as AOV. However, it’s one of the most important KPIs for predicting long-term success and there are several formulas used to calculate it.

Why CLTV Beats AOV

Indicates Long-term Revenue Growth

While AOV shows current revenue data, CLTV is the best tool for projecting future revenue growth. This is because merchants can use lifetime value data to make changes within their ecommerce store to improve customer relationships, ultimately growing AOV and extending CLTV at the same time. Large brands with the best customer loyalty usually focus heavily on attracting and maintaining a relationship with high-value customers.

Lowers Customer Acquisition Costs (CAC)

Think about your online shopping history. How often do you return to an ecommerce store after making your first purchase? What led you to shop there in the first place? Although we as consumers don’t put much thought into it, online merchants put time and money into advertising, branding and other marketing that influences us to purchase from a new store — this is called customer acquisition costs, or CAC.

It's important to keep CAC low to maintain profits, but it’s a necessary cost when growing your consumer base. Fortunately, you can keep CAC low by utilizing CLTV to maintain high-value customers instead of cycling through one-time shoppers. As you gain more repeat customers, you’ll be less dependent on acquiring new ones.

Shows Evolving Buying Behaviors

As an ecommerce merchant, customer data is always at your fingertips — how you use it is up to you. A major benefit of maintaining a long-term relationship with customers is the steady data they offer. Unlike one-time customers, these regulars will show you how buying patterns can change over time.

How to Extend CLTV

Woman online shopping.

Extending customer lifetime value is no easy task — it requires time, effort and resources to keep consumers coming back for more. This includes:

Seamless User Experience

Even if you have the best product in the world, an unpleasant user experience can make consumers reluctant to return. In fact, 88% of online consumers are less likely to return to a site after a bad user experience. Focus on creating a seamless buying journey without unnecessary clicks or distractions. Oftentimes, consumers browse online without a product in mind — this is where you can provide possible options to make their buying experience easier and push them toward checkout.

The entire checkout process should be short and simple. Avoid requiring a username and password to buy products and only offer product add-ons if they specifically relate to the items in the shopper’s cart.

Replenishable Offers

Regardless of what you’re selling, you can likely offer products or add-ons that make customers want to come back for more. A great way to guarantee a long-term relationship is to offer subscriptions alongside one-time purchase options. If your product is replenishable, you could entice customers to sign up for a subscription by offering a subscribe-and-save deal instead of the customer paying full price every time they run out of the product. Consider offering a flexible subscription model that gives customers the ability to cancel, pause, skip or change it as needed. As long as you continue to meet consumers’ needs for flexibility and control, you can extend CLTV and build brand loyalty.

Using Data for Personalized Marketing

Your branding and marketing efforts should feel unique. Eco-friendly cleaning product brand and longtime sticky.io client Truly Free is an expert at standing out from the competition. “Generic packaging and one-size-fits-all subscription options are quick ways to lose customers and diminish your community’s spark,” warned founder and CEO Stephen Ezell. “From the first day, we understood our customers are human. We found a way to apply that human-first attitude even with hundreds of thousands of members,” Ezell said.

Truly free subscriptions

Reliable data can help brands apply that human-first attitude and delight customers month after month. While general promotions targeting a broad audience can resonate with some people, focusing on a specific audience and tailoring your marketing to their pain points and needs is much more effective. Especially when you have data from past transactions, personalization is key to keeping the customer coming back for more.

Additionally, providing specific online content to certain customers is an easy way to inform them of the new products and services most relevant to them. If a customer signed up for email updates during the checkout process, make sure to only send relevant content and specialized offers their way to keep them engaged. Be sure to constantly optimize your marketing campaigns based on the data so you can create an even more engaging experience throughout the entire customer lifecycle.

The Bottom Line

ecommerce merchant shipping products.

There are two ways to grow your business: by acquiring new customers or maintaining a relationship with existing ones. While there’s nothing wrong with generating revenue from one-time purchases, focusing on customer retention will create value for the long haul and deliver a better return on investment.

See how sticky.io helps build stronger customer bonds and extends CLTV. Schedule a demo today.