What is Customer Lifetime Value and How is it Calculated?

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Customers are the cornerstone of any business’s success. Making that initial sale is important, but building a relationship and retaining your client is the true key to success.

This article will explore Customer Lifetime Value (CLTV). We’ll tell you what it is, why it’s important, and how it can help you increase your company’s profits.

What is Customer Lifetime Value?

What is Customer Lifetime Value and How is it Calculated

Firstly, you need to understand what CLTV is. As the name suggests, it’s the value a customer throughout their time of doing business with your company.

You measure CLTV from their first purchase right until their last. This information can show you what your customers are spending, and also highlight which of your products have been the most popular.

Certain platforms are built around improving CLTV, such as loyalty programs. It’s vital information to use, and figuring out the data requires a few steps.

How it’s Calculated

How do you calculate the metrics for CLTV? The first step is calculating the average purchase value. To do this – you need to pick a certain time – divide your total revenue by the number of purchases during your chosen timeframe.

Then work out the purchase frequency rate. Divide the purchase value by the number of unique customers. Next, you can calculate customer value. Multiply the average purchase by the frequency.

You can figure out your customer’s lifespan by averaging the number of years they’ve been purchasing from your company. So for the CLTV: multiply customer value by their lifespan.

Why It’s Important

By calculating CLTV you can make predictions for how much a customer is going to be spending on your company. You can do this maths at any time to give yourself an accurate account for a customer’s value.

Plus, it does not require a high level of arithmetic to implement and understand. Its main purpose is to help your business and help you understand your consumer base. Remember the higher your numbers – the better your profits.

Boosting Lifetime Value

Once you have made your calculations for CLTV, this number will not be set in stone. You want to focus on maintaining customer relationships as it’s much easier to keep loyal clients rather than gaining new ones. There are plenty of things you can do to boost the lifetime value of your customers.

Build loyalty programs, offer freebies and incentives. Make returning products easy. Plus make sure it’s easy for customers to get in touch with your company when they need to. You want to keep them happy and coming back to you.

CLTV is vital data for businesses as it can show you the potential of your customers and the popularity of products. Failure to spend time working it out could result in your company falling behind. How would you improve CLTV for your company?

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Author: Craig

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