If you’re intent on adopting a value management approach to guiding your customer interactions, then it’s imperative that you know how to zero in on customer lifetime value (CLTV). This metric is key to attaining growth for your company, and knowing this figure will help your business attract and retain your most valuable clientele. Here’s what you’ll need to know about the basics of CLTV and calculating it for yourself.
What Is Customer Lifetime Value?
To put it into simple terms, CLTV is the total revenue your business can expect from a single customer over the course of your relationship. CLTV takes into account the costs for acquiring the customer (CAC), of course, along with additional expenses like sales and marketing to retain your customer, operating costs, the costs of creating your products and services, etc. By and large, though, the longer that customer continues to buy things from you, the greater you can expect that lifetime value to become.
Why is this number important, you might wonder? Though many businesses choose to prioritize short term sales, it’s actually a more prudent strategy, in many cases, to keep a customer around for repeat business. Customer retention often boosts profits, and if you have a method of determining a customer’s lifetime potential for revenue then you can start to optimize for the long haul. Next, let’s talk about how that’s done.
In order to calculate your lifetime value, you’re going to need to know a few other numbers:
- Average sales value — The total revenue in a period divided by the number of purchases during that same period.
- Average purchase frequency rate — The number of purchases during a period divided by the number of customers who made purchases during that same period.
- Customer value — Average purchase value multiplied by average purchase frequency rate.
- Average customer lifespan — The average number of years a customer continues to buy products/services from your business.
Got all that? Now, to calculate your CLTV you’ll want to multiply your customer value by the average customer lifespan number you just determined. As you can see, there are a few steps to this, but if you’ve got the mind for numbers it shouldn’t be too difficult. If you need an easier way to go about it, though, you might instead try looking online for a free customer lifetime value calculator that will allow you to plugin numbers and compute that total for you.