What is Customer Lifetime Value?
Customer lifetime value (CLV or often CLTV), lifetime customer value (LCV), or life-time value (LTV) is a measurement that indicates the total revenue a business can reasonably expect from a single customer account. This metric helps you understand a reasonable cost per acquisition. Businesses use this metric to identify significant customer segments that are the most valuable to the company.
The purpose of the customer lifetime value metric is to assess the financial value of each customer for a business.
Customer Lifetime Value Model
- Calculate average order value: Calculate this number by dividing your company’s total revenue in a time period (usually one year) by the number of purchases over the course of that same time period.
- Calculate the average purchase frequency rate: Calculate this number by dividing the number of purchases over the course of the time period by the number of unique customers who made purchases during that time period.
- Calculate customer value: Calculate this number by multiplying the average purchase value by the average purchase frequency rate.
- Calculate average customer lifespan: Calculate this number by averaging out the number of years a customer continues purchasing from your company.
- Then, calculate LTV by multiplying customer value by the average customer lifespan. This will give you an estimate of how much revenue you can reasonably expect an average customer to generate for your company over the course of their relationship with you.
The Value of Knowing Your CLV
Calculating the CLV for different customers helps in a number of ways
- How much you can spend to acquire a similar customer and still have a profitable relationship
- What kinds of products customers with the highest CLV want
- Which products have the highest profitability
- Who your most profitable types of clients are
Together, these types of decisions can significantly boost your business’ profitability.