Customer lifetime value (CLTV, or CLV) is a measure of the total income a business can expect to bring in from a typical customer for as long as that person or account remains a client. It’s an important metric because it’s a measurement of how valuable a customer is to your company, not just on a purchase-by-purchase basis but across the entire lifetime of the relationship.
Knowing that it costs less to keep existing customers than it does to acquire new ones, increasing the value of your existing customers is a great way to drive revenue growth and profits.
By knowing your CLV on an account or customer by customer basis allows you to determine which customers or accounts contribute the most revenue to your business. This allows you to serve these existing with products/services they like and make them happier, resulting in them spending more money at your company.
CLV can also be used to target your ideal customers. When you know the lifetime value of a customer, you also know how much money they spend with your business over a period of time. With that knowledge, you can develop a customer acquisition strategy that targets similar customers.
To get started calculating customer lifetime value, you need to calculate the average purchase value and then multiply that number by the average number of purchases to determine customer value. Then, once you calculate the average customer lifespan, you can multiply that by customer value to determine the total customer lifetime value.
Simply put, the formula for Customer Lifetime Value = (Customer Value * Average Customer Lifespan) where Customer Value = Average Purchase Value * Average Number of Purchases.
For example, a fictitious coffee shop chain called EZ Bean has three locations and has an average sale of $5 per customer. The typical customer is a local worker who visits two times per week, 50 weeks per year, over an average of 5 years.
With the above information we now have all the variables needed to calculate the CLV for EZ Bean.
CLV = $5 (average sale) x 100 (annual visits) x 5 years (lifespan) = $2,500