4 Steps to Calculate Shopify LTV & 5 Tips to Improve Yours!

Customer Lifetime Value (LTV) is a very significant metric for Shopify merchants. You can understand the current and future performance of your business when calculating your Shopify LTV.

Besides, this metric will tell you what you should do to increase purchases and revenue. So, if you are looking for ways to calculate it, you are in the right place.

In this blog, you will find the basic formulas with the guide to apply them to your calculation, along with some tips to boost your Shopify LTV. Let’s start now!

What Is LTV (customer lifetime value)? 

Customer lifetime value is the total amount of revenue that a customer will generate for a business over the course of their relationship with that business. This metric takes the analysis a step further by accounting for customer lifespan rather than relying solely on individual orders or overall revenue.

The longer a customer’s lifespan is with your business, and the more he spends buying your products, the higher his LTV. With this metric, you can gain valuable insights into your revenue, the most profitable customers, and financial viability. 

During your research, you may come across the CLV term. In fact, LTV is slightly different from CLV, but many businesses use them interchangeably, so we will treat them as the same metric in this blog as customer lifetime value.

Why is Shopify LTV Important For Merchants? 

LTV can tell you how much money they should spend on customer acquisition. For example, if your business has $10 of Shopify LTV, but you have spent $11 on ads to successfully convert 1 customer, that means your marketing effort is not effective. 

Moreover, Shopify LTV informs you which customers you should be focused on and, more importantly, why. Moreover, there are other benefits it can bring to your business:

1. Driving repeat purchases and revenue: Shopify LTV identifies the customers that spend more money on your business by revealing the number of sales per customer. That assists you in determining who your targeted groups are. Then, you can have strategies in place to boost repeat purchases and profit margins. 
2. Developing products and categories: Shopify businesses can better understand what types of products their customers prefer through their Shopify LTV. They can utilize that insight to develop products that are appealing to their customers.
3. Increasing customer loyalty: After learning your Shopify LTV, you may try to increase LTV with some methods, such as customer support, personalization, and loyalty programs. These methods will result in more repeat customers and a greater retention rate. 
4. Optimizing your LTV:CAC ratio: A LTV:CAC ratio indicates how effective your marketing is. By calculating and improving the Shopify LTV, you will learn how your marketing efforts affect customer profitability and make any necessary changes to your next marketing campaigns.

How to Calculate LTV For Your Shopify Store? 

Before we dive into the customer lifetime value, Shopify businesses like you need to segment their customers with RFM.

RFM is a technique for arranging your customers from least valuable to most valuable by accounting for the three core factors of measuring customer value into account: Recency, Frequency, and Monetary value.

By segmenting your Shopify customers with RFM, you will be able to look into each group individually and identify which one has the highest Shopify LTV.

• Get to know the customer lifetime value formula

After segmenting your customers using RFM, you can now calculate the value of each segment to evaluate which customers perform the best.

LTV is time-dependent. Hence, you should compute it over a specific time period, which should be specific to your business and factor in elements such as purchasing frequency and seasonality. 

Moreover, LTV must be calculated using both past sales data and assumptions about customer behavior over time. The following is the basic formula for determining your Shopify LTV:

LTV = (Average Order Value) x (Average Purchase Frequency) x (Average Customer Lifespan)

As you can see, in order to calculate the customer lifetime value for your customer groups, you will need to collect 3 crucial pieces of data, including Average Order Value, Average Purchase Frequency, and Average Customer Lifespan.

#1. Average Order Value (AOV) reflects the average amount of money spent by a customer when placing an order.

Average Order Value = Total Sales / Order Count

To access this information for your Shopify store: 

• Go to the Reports section of your Admin and look at your monthly sales. 
• To obtain a more accurate figure, click Define under Total Sales and 
• Uncheck everything but Subtotal.

#2. Average Purchase Frequency (APF) indicates the average number of orders placed by each customer, calculated during the same time period as your average order value. 

Average Purchase Frequency = Total Orders / Total Customers

To access this information for your Shopify store: 

• Go to the Reports section of your Admin and find this information under Sales by Customer. 

#3. Average Customer Lifespan (ACL) relates to how long a customer remains active and engaged with the business. This can be measured by keeping track of the period between a customer’s first and last purchase, or by computing the average customer lifespan based on previous data.

Average Customer Lifespan = Sum of Customer Lifespan / Total Customers

Note: If your company is new and lacks the required sample size of customers, ACL can be calculated using the churn rate with the following formula.

Average Customer Lifespan = 1 / Churn Rate

• Start calculating your Shopify LTV

You can calculate Shopify LTV for your store either manually or using third-party apps. Manual calculation requires you to follow the steps below:

Step 1: Calculate the average order value
Step 2: Calculate the number of repeat sales
Step 3: Calculate the average customer lifespan
Step 4: Multiply the three factors

Consider your McDonald’s breakfast consumption, for example. Assume you stop by McDonald’s for a $7 breakfast meal before heading to work. If you only come by on weekdays, this is how much you spend on breakfast each year:

• $7 per meal x 52 weeks x 5 days a week = $1,820 

Let’s take into account how long you are likely to remain a customer. If you have been a regular at this restaurant for 4 years, your LTV is:

• AOV x APF x ACL = $7 per meal x (52 weeks x 5 days a week) x 4 year lifespan = $7,280

Alternatively, you can use one of third-party profit tracker tools to calculate your Shopify LTV.

For example, TrueProfit is a purpose-built app for this type of analysis. It provides a simple approach to Shopify lifetime value and other financial metrics in real time. That means no need for the spreadsheets anymore!

TrueProfit will gain you insights into customer behavior and allows you to mark areas for improvement to have better customer engagement and retention. 

With just a few simple steps, you can instantly calculate your Shopify LTV using the TrueProfit app:

• Step 1: Create a TrueProfit account and link it to your Shopify store.
• Step 2:  Set up the fundamental values.
• Step 3: When you have enough customer data, the app will utilize its algorithm to determine each customer’s LTV. By taking into account necessary factors, TrueProfit estimates your Shopify LTV quickly.
• Step 4: The insights into customer behavior will be available for you to determine which areas need improvement.

After you’ve successfully installed TrueProfit, log in to your account > Go to Customer Analytics Report, and you’ll see your Shopify’s customer lifetime value, customer acquisition cost, LTV:CAC ratio, etc. as shown below:

5 Tips to Increase Your Shopify LTV 

After your calculations of Shopify LTV, you may have yielded some promising results. However, it is always a good idea to think of improvement! Below are some tips to get the most of every customer and boost your Shopify lifetime value.

Tip #1. Run cross-sell and upsell campaigns

Upselling and cross-selling are effective methods for raising Shopify LTV since they encourage customers to buy more products or upgrade to higher-value options.

These methods are used to market to existing customers rather than the new ones. It is because selling to a current customer has a 60% to 70% likelihood of success compared to a 5% to 20% likelihood of selling to a new one, according to Marketing Metrics. 

Online businesses can provide personalized product recommendations and combine relevant products together, encouraging your shoppers to purchase more, increasing your AOV and customer lifetime value.

Beardbrand has a campaign where their customers can add products to their cart for special bundle pricing. 

Tip #2. Implement loyalty campaigns

Loyalty programs, which incentivize customers to make repeat purchases and connect more closely with the business over time, are another powerful method for raising Shopify LTV.

More than 84% of customers say they would commit to a brand that provides a loyalty program. In fact, customer loyalty programs are used by more than 90% of businesses. That proves it is one of the most effective strategies to boost revenue and retain customers. 

Therefore, you should build a loyalty program to communicate to your most loyal customers that you appreciate them by providing special rewards for their repeat purchases. You can offer several incentives in your loyalty program, such as:

• Points
• Gift cards
• Exclusive discounts
• Cashback
• Early access
• Free swag

For example, the North Face has a loyalty program in place that offers exclusive gear, birthday gifts, points on each purchase and rewards for their members.

The North Face uses this program to learn about their customers’ behaviors and foster the relationship with them by engaging them with the brand’s unique benefits.

Making them feel unique, giving attractive incentives and points systems, and cultivating customer loyalty will enhance the likelihood that they will continue to buy from you over time. That translates to a higher LTV Shopify merchants all wish to have!

Tip #3. Optimize customer experience

Excellent customer service can help you create strong relationships with your customers and gain their loyalty. The XM Institute reports that 95% of customers who rate a business’ customer service as “very good” are inclined to recommend the business to their friends or family.

That leads to more potential customers, more sales, and less acquisition costs for your business. In fact, customer experience leaders earn revenue faster, lower costs, and charge more for products.

Some simple strategies to improve customer experience include:

1. Open to customer feedback which can be used to improve the experience later.
2. Collect and use Zero-Party data to customize experiences and provide personalized recommendations and offers.
3. Offering quick and easy assistance 
4. Assessing performance and adapting to see if your customer experience is good or needs any improvement.

Customer experience needs ongoing nurturing and care. Yet, by implementing the right strategies, you can ensure a good experience for your customers. That will eventually result in increased sales and Shopify LTV. 

Tip #4. Offer a subscription service

A subscription is a good method to raise the time a customer spends with your business if you sell items that can be sold through a subscription model (e.g., cosmetic products, food or beverage, etc.). 

Nowadays, customers value convenience, and according to a McKinsey study, 15% of online customers have joined up for one or more subscription services to receive recurrent products. In fact, the subscription eCommerce business is quickly expanding, with a projected value of $478.2 billion by 2025. 

That’s why you may need to create a subscription service to tailor to your customers’ needs. In addition, you will have a consistent monthly cash stream, which means guaranteed revenue if you provide annual or longer-term subscription options.

Take a look at the subscription service of Family Dinner. There are many options that provide their customers with healthy and fresh ingredients for your family’s meals.

The products are delivered weekly to your home or office on Saturday, with the payment required to be made in advance on Monday.

Ultimately, a subscription box assists in converting one-time buyers into recurring customers. Besides, it can ensure greater cash on hand, and lowers customer acquisition expenditures.

Tip #5. Use retargeting ads

Retargeting is another useful strategy for raising Shopify LTV since it allows you to target customers who have previously expressed interest in your products or services with the goal of increasing their purchase frequency

You should display tailored adverts to customers who have visited their website or added products to their shopping carts. By doing that, you can encourage customers to complete their purchases and engage with their brands longer.

Retargeting advertising is frequently less expensive than ads aimed at new potential customers. Therefore, this can help you save money on acquisitions over time. Remember to target your remarketing campaigns to places where you can deliver.

Shopify LTV – Frequently Asked Questions

• Does Shopify show LTV?

No, it doesn’t. You will have to collect the necessary data and compute the Shopify LTV metric yourself.

• What is LTV Shopify?

LTV Shopify is the value of a customer to your business throughout the course of your relationship with them.

• What is a good LTV for eCommerce?

LTV is looked at in ratio to customer acquisition costs. The optimum LTV:CAC ratio is one in which your LTV is at least 3 times greater than your CAC. For example, if you spend $100 to acquire a customer, that customer’s lifetime value should be at least $300.

• How do you calculate LTV for eCommerce?

You can calculate Shopify LTV for your store either manually or using third-party apps. Calculating manually requires you to segment customers, collect data and apply them to the formulas. Meanwhile, with third-party apps, the process is fully automatic and fast.

Ready to Know & Improve Your Shopify LTV?

To conclude, the Shopify LTV measure assists you in determining your most profitable customer groups while keeping your cost per acquisition as low as possible.

So, after computing your Shopify LTV, you can now begin developing smarter, more efficient campaigns by optimizing your spending and adjusting your targeting.

In the end, the ultimate goal of raising lifetime value Shopify store owners all have is to create sustainable growth and establish a loyal customer base. With our tips, you can build a long-term business strategy, generate higher revenue, and increase profitability.

Discover what proper profit-tracking looks like at trueprofit.io