How to Calculate Amazon Customer Lifetime Value (CLV)
For most Amazon stores customer lifetime value is an under utilised metric. The prominence of Advertising Cost of Sale (ACoS) trains us to look closely at the cost of each sale but many products are designed for repeat usage.
Acquiring a customer who then buys the same product from us on many subsequent occasions, often because they’ve signed up for Subscribe and Save, is the ideal scenario.
Knowing our repeat purchase rate and the total revenue we make on each customer is incredibly useful. Used in the right way customer lifetime value (CLV) is the ultimate Amazon power move. It has the potential to accelerate sales, increase market share and increase profit.
In this article we’re going to run through
- What is customer lifetime value
- What are the benefits of knowing CLV
- How to measure customer lifetime value
Capturing and understanding lifetime value is the crucial first step to improving this metric. Once you’ve done that read our article about ways to improve Amazon customer lifetime value.
What is Customer Lifetime Value
Customer lifetime value can be defined as
For rarely re-purchased products a simple calculation will tell us what that value is
Profit per Unit Sale = Gross Revenue – (Sales Tax + FBA + Amazon Referral Fee + COGs + Advertising Spend)
If we don’t expect people to come back and buy from us again then we can assume this calculation tells us not only the profit per sale but also the customer lifetime value.
But what happens when we expect the customer to buy from us again? We have no way of knowing whether our initial Amazon advertising spend is contributing MORE than just the profit from the first purchase.
This is where customer lifetime value comes in. By viewing performance at the customer level we can see the long term value of acquiring a customer.
Knowing CLV will unlock many opportunities for growth, let’s now dive into the benefits. After that I’ll take you through the process of calculating CLV.
3 Core Benefits of Calculating Customer Lifetime Value
- It Can Unlock and Accelerate Revenue Growth
To simplify, if it costs £10 to acquire one sale of a £50 product on Amazon the ACoS is 20%. If, on average, customers repurchase on 4 subsequent occasions the total revenue is £250.
Now we can look at our advertising spend in a completely different light. Instead of as a cost of one sale we’re now looking at it as a cost of total revenue. The £10 initial ad spend is now only 4% of revenue.
That leads to a powerful conclusion;
Profit margin has drastically improved. If we now increase advertising budget and increase the target ACoS we can capture even more customers. We can do this because we’re safe in the knowledge that they will contribute additional revenue over the coming months.
Increasing our ACoS is a competitive advantage. If you can afford to spend more to acquire a customer you can improve your reach and increase the number of ad slots you occupy.
Given that there are only a limited amount of ad slots on Amazon, this increases your revenue whilst reducing your competitors. Soon your market share begins to rise.
- It Tells us How Profitable Subscribe and Save is
Amazon’s subscription service is widely available. From the outside looking-in we assume it must be successful.
When it comes to our own products and store, we should ask – how do I know whether Subscribe and Save is successful?
If you know your customer lifetime value before and after launching Subscribe and Save you’ll be able to assess whether giving customers a 5%-15% discount has in fact had the desired effect.
- It Tells us Which Products and Product Categories are more profitable and where to Allocate Spend to Increase Profit
If we know that Product A has a much greater lifetime value than Product B then we can adjust our advertising spend to drive more sales of Product A.
The same logic will apply at a product category level too. If we know that there’s a greater lifetime value from moisturisers than face masks then we might allocate a greater percentage of our budget to the moisturiser products.
A Word of Caution
Remember that these are general rules of ecommerce. It is vitally important that you don’t take them at face value.
Ensure that you are frequently validating whether these strategies are actually beneficial. Don’t assume that just because they are best practice strategies that they will inevitably work for your products and brand.
Ok, now we know the what CLV is and why it is so important. Roll up your sleeves we’re about to delve in to the nuts and bolts of calculating lifetime value.
Where to Find the CLV Raw Data
To find your repeat data, all you need is one report from your Seller Central dashboard. Please note that what follows is designed for FBA sellers. The principles are the same for other types of sellers but you may need to reorganise your sales data to get it into a similar structure as what follows.
The raw data is stored here;
Reports > Fulfilment By Amazon > Amazon Fulfilled Shipments
We use this specific FBA report because it provides some key data points that other reports don’t.
Make sure you export the correct report otherwise you won’t be able to follow this guide.
Export the data.
Annoyingly it’s one month at a time. Consolidate the transactions into one file and you’re ready to get started.
To get the most accurate lifetime value use at least 1 year’s worth of transaction data.
Step 1: Pivot the Data
We now have ourselves a pivot table, which we can use to find out the following values
- Number of Customers
- Total £/$/€ of Orders
- Total # of Orders
Step 2: Sort the Pivot Table by Item-Price
Sort your table as shown below with Buyer names as the row (redacted here for anonymity) and values as the Sum of item-price
Step 3: Count the Total Number of Buyers
At the bottom of the table there will be a sum for the item prices. To count unique customers either highlight all the cells and look at the number in the bottom right, or ad the COUNTA function as show in the screenshot.
Step 4: Start to Consolidate the Total Data
Now, create a new worksheet. This is where we report the final outputs. Add in the Total Order Value (total sales revenue) and total number of customers as below.
Step 5: Calculate Number of Unique Orders
Create a new pivot table with ‘Amazon order item id’ as the row
Step 6: Count Number of Unique Orders
Follow the same process as step 3.
Step 7: Add Unique Orders to the Report Summary
Paste the total orders into the summary
Step 8: Calculate Average Order Value, Average Order Frequency and Annual Customer Value
Now we get to calculate some key metrics. Use the functions listed in column G
Let’s go into a bit more detail to explain the importance of this step
Average Order (over a defined period, a year in this case)
Average Order Frequency (over a defined period, a year in this case)
Average Customer Value (over a defined period, a year in this case)
The value above is the amount on average a customer is worth to the business each year, and already we can see that it provides a fresh angle in how we view acquiring customers, above and beyond ACOS.
The ACV figure also enables us to think in terms of two growth levers, frequency and average order value , rather than purely revenue alone
Step 9: Calculate Average Customer Lifetime
The final step to calculating the Total Customer Lifetime Value is to multiply our Average Lifetime with our Expected Average Customer Lifetime.
Average Lifetime is the average duration that customers have a purchase relationship with your business.
Now this is where it can get a little less easy and more qualitative, depending on how much historical data you have as a business.
We need to come up with a figure for how long on average a customer is retained by the business. For some types of subscription service this will be easy to measure, or business’ with years of data this can be measured fairly accurately.
For business’ with only a few years or less of data, knowing the business and the customer well yourself will be key here as you will be estimating this value based on your product and your experience
Measuring the customer churn can be a way of deriving an estimate for this value as well
Churn = 1-(Retained Customers Year 2/Total Customers Year 1)
This calculation to give you churn rate which is the same as the average customer lifetime in years.
Pro Tip: Sense check this with business data from your other channels
Average Customer Value (over a defined period, a year in this case)
Expected Average Customer Lifetime (over a defined period, a year in this case)
= Total Customer Lifetime Value
Step 10: Calculate Total Customer Lifetime Value
We now know the customer lifetime duration. We drop this into our report summary. In the screen grab we have titled this as ‘Expected customer life years’.
By multiplying this value annual customer value we come to the total customer value.
In Summary: CLV Will Help You To Dominate Your Market
The big question you should now be asking is; how different is CLV to the revenue per transaction?
In our example the CLV is £392. The seller is a cosmetics brand. The average first purchase revenue is £35.
If we were to establish an ACoS target based only on first purchase revenue (the common way to measure ACoS) we would be potentially massively restricting our ability to grow the business.
This is why we talk about customer lifetime value as a power move. It forces us to look at our advertising strategy from a different perspective.
Let’s say you’re happy to spend £10 to achieve a £35 sale. If you knew that the average customer goes onto spend £392 would you increase your cost per sale target to acquire even more customers?Of course you would.This is what the most advanced Amazon sellers are doing but I guarantee you most of your competitors are fixated on ACoS.
Use CLV to out-compete them and dominate your market.