The term customer lifetime value (CLV), often called lifetime value (LTV), is a metric that represents the total revenue a business can expect the customer to generate (with reasonable expectations) over a period of time. It’s a metric that all Amazon business owners should consider because it can provide insights that help determine advertising and retargeting strategies, and ultimately understand your customer’s buying process.
The challenge of it all, is calculating customer lifetime value across Amazon, and other sales channels is very difficult. But, it’s worth the work. Once you understand more about your CLV, it makes it easier to find both opportunities and challenges within the business itself. As a result, offering more insight on potential opportunities for increasing revenue.
To make things even more challenging, finding the correct Amazon report to calculate your CLV usually leads to frustration. Lucky for you, we’ve got it figured out below! It just takes downloading reports and a little bit of math to figure out your CLV.
What Is Customer Lifetime Value?
CLV is the total value a customer brings to the business over the entire time they purchase from your company.
Determining an Amazon Customer’s Lifetime Value
If you offer a product that is not often re-purchased by the buyer, the calculation is rather simple. It is:
Profit per Unit of Sale = Gross Revenue – (Sales Tax + Fulfillment by Amazon Cost + Amazon Referral Fee + COGs + Advertising Spend)
For most other customers, this is not enough. Whether you expect the customer to buy a product more than once will change based on many factors. From this basic formula we cannot tell if the initial spend on Amazon advertising is doing anything more than just creating a profit from the initial purchase. If you’d like to know more, there’s a great HubSpot blog about customer lifetime value which will give you a better understanding of your customer’s journey and their relationship with your business and products.
How Do I Calculate Customer Lifetime Value?
Now we’re on to the good stuff! Follow the steps below to calculate your CLTV:
1. Transfer Data from Amazon to the Spreadsheet
Before you can calculate CLV you need to get data. If you are an FBA seller, you’ll need to gather your repeat data. This is found on your Seller Central dashboard. You’ll find it under “Reports” → “Fulfillment by Amazon” → “Amazon Fulfilled Shipments.”
This report provides all the info you need. Export the data in .csv files, a month at a time, until you have at least a year’s worth of data. Consolidate the data into a single file and import this into the spreadsheet software of your choice.
We will be using Google Sheets as our software, and placing our data into a sheet called “Raw Data.”
2. Create a Summary Sheet
Create another sheet called “Summary” in your spreadsheet. Summarize the data by using Google Sheets functions. To start with you’ll gather some key data points based on the raw data imported from Amazon.
- Total Order Value: The total amount spent by all buyers.
- Number of Orders: The total number of orders represented by the data.
- Number of Customers: The number of (unique) customers, determined from the obfuscated Amazon buyer emails.
- Timespan of Data: The number of days covered by the data.
=MAX( ARRAYFORMULA( DATEVALUE( LEFT('Raw Data'!G2:G, 10)))) - MIN( ARRAYFORMULA( DATEVALUE( LEFT('Raw Data'!G2:G, 10))))
- You will probably have a few months more or less than a year’s worth of data. This automatically determines how many days the data encompasses so that your summary calculations are scaled to a per–year metric.
- Warning! Make sure there aren’t any blank rows at the bottom of the “Raw Data” sheet, otherwise you’ll hit errors with this formula.
3. Final Calculations
Using the values you just calculated, you can now find your customer’s lifetime value. These formulae reference the cells you just created, so your exact cell coordinates might be different from ours. The screenshot above is included for the visual learners among us!
- Average Order Frequency: This computes the average number of orders each customer makes per year. Obtain with:
365 × (Number of Orders / Number of Customers / Timespan of Data)
- Average Order Value: Across all orders, determine the average order value with:
Total Order Value / Number of Orders
- Annual Customer Value: The average amount spent per customer in one year:
Average Order Frequency × Average Order Value
- Expected Customer Lifetime: This is your estimate of the average lifetime of your customers, in years. This can be discovered using the raw data from Amazon, however the steps to do so are more complex than is appropriate for this blog.
- Customer Lifetime Value: The average amount spent over the course of a customer’s relationship with your company:
Annual Customer Value × Expected Customer Lifetime
Getting More Advanced
The steps outlined above will give you an estimate of the average customer lifetime value. However, that’s only one type of average–one of the easiest types of averages to calculate. There are many ways to calculate the average of a dataset, and the context of the dataset must be considered when deciding on your method.
For example, we have found that classifying our customers by their repeat purchase frequency (e.g. if they have only made one purchase, or if they’ve made two, three, five, seven (etc.) purchases) is very useful.
We can then calculate the average customer order frequencies, order values, and expected lifetimes for each buyer category. Once we have that, we determine a weight value for each buyer category based on their density in the dataset (e.g. 57% of buyers only purchase once, 26% purchase twice, 13% purchases three times, and so on). These weights allow us to find the weighted average customer lifetime value. This will give a similar, but more accurate, estimate of your CLV.
Unfortunately, the formulae used for this is too complex and long-winded to be in a blog post. Fortunately, we’re working on a web-based calculator that will do the work for you!
Customer lifetime value gives you a better understanding of your customer journey. You could gain insight on how much it costs you to gain a new customer and how long, on average, your customers are staying with you. To begin improving your CLV, you must first know where it stands as is.
Sign up for our lifetime value calculator below and get a sneak peek of your more precise weighted average CLV.