Have you heard people talking about their LTV or CLV and wondered what they were talking about? The good news is, they’re the same thing! We’re here to break it down, tell you how this is calculated, and why it is important for your marketing strategies on Amazon and beyond. We’re providing you with an in-depth explanation, and if you stick with us to the end, you’ll find a link to a handy template to calculate your Amazon LTV with instructions included in the file!
What Is the LTV?
The Lifetime Value (LTV) or Customer Lifetime Value (CLV) is the total revenue that a customer will spend while they’re shopping on your site. The simplest way to calculate this is by multiplying the Average Profit Per Customer by the Expected Customer Lifespan. If these metrics are unclear, there’s just a little bit more analysis required to calculate your LTV.
Breaking Down the Math
If you have your customer and sales history data handy, you can calculate the LTV using your average order value (total revenue divided by the number of orders for a given time period) by your average gross margin. Then, multiply that number by the customer’s retention period, which is a percentage.
To obtain your customer’s retention period, pick the time period you want to use the data from (we recommend using 90 days worth of data). Then, see how many customers you have at the beginning of that time (call this “S”) and the total number of customers you have by the end of the period (call this “E”). By subtracting the number of customers you had at the beginning of the time period from the total number of customers you have by the end of the time period, you now know the number of new customers you acquired (call this “N”).
Put this into a formula, and you have your customer retention rate!
You can also use this formula to calculate the LTV of customers who shop your brand on Amazon and is directly impacted by the number of households with a Prime subscription. The average Prime subscriber has an LTV of $2,283, which is more than the average Amazon shopper without a Prime subscription. Considering it is estimated that just over 50% of US households have a Prime membership, this is very important to know.
If you want to calculate your LTV on Amazon, use this handy Customer LTV Calculation sheet, just as we promised! In order to use the Customer LTV Calculator, you will need to create a copy to download via Google Drive, as the original copy is “view only.”
Why the LTV Is Important
When you have access to Amazon Vendor Central or Amazon Seller Central, you have access to Brand Analytics. This will give you insights into the demographics of your brand’s consumers, and with your LTV calculated, you can determine which of your demographics is the most profitable. If you run Subscribe & Save programs on Amazon, you can design loyalty programs around this information.
The LTV metric is crucial to inform your marketing strategies and goals on Amazon and beyond. Learning who your most loyal and profitable customers are can help you determine which audiences to target to not only obtain customers who are new to your brand but keep them for as long as your customer retention rate indicates or longer!