What does customer lifetime value mean?

"Customer lifetime value (CLV or CLTV) is a metric that shows the revenue expected from a client's account over the duration of the business relationship."

This metric considers the value of a customer. Compare it to the predicted lifespan of the company customer connection.

Essential Aspects of Calculating Customer Lifetime Value

Calculating Customer Lifetime Value (CLV) includes elements that help businesses grasp the overall value brought by a customer throughout their interaction, with the company. These are some components;

Customer Acquisition Cost (CAC). These are the main things;

 Advertising Expenses

 SEO and SEM

 Sales Software and Tools

 Employee Salaries and Commissions

 Sponsored Events

 Regulatory Compliance

Average Purchase Value (APV) indicates how much a customer spends on average in one purchase. It can be calculated by dividing revenue by all purchases made in a period.

Average Purchase Frequency Rate (APFR); This measures how often a customer makes purchases within a timeframe.

When you want to find out how purchases each customer made on average simply divide the number of purchases by the number of unique customers.

Total Number of Purchases; This refers to all the transactions carried out by customers within a timeframe.

Number of Unique Customers; shows how many people made purchases in that timeframe.

Customer Retention Rate (CRR); CRR measures the percentage of customers a business retains over a given period serving as an indicator. It reflects customer loyalty and satisfaction. Here's a detailed breakdown of CRR;

Components of CRR

Number of Customers, at the Beginning (S); The customer count at the start of the period.

Number of Customers at the End (E); The customer count, at the end of that period.

Number of New Customers Acquired (N); Total number of new customers gained during that timeframe.

A customer's lifetime value (CLTV) can be determined by considering factors such as their purchase value, frequency of transactions over time, and how loyal they are. Businesses can calculate revenue generated by each customer while factoring in profit margins by combining these elements. For maximizing profits and optimizing marketing strategies, it is crucial to understand how each customer contributes to the company.

To calculate CLTV;

Customer Lifetime Value = Lifetime Value x Profit Margin

Lifetime Value = Average Purchase Value x Number of Transactions x Retention Period 

Example Calculation;

Average Purchase Value; $100

Number of Yearly Transactions; 5

Retention Period (, in years); 3

LTV = 100 × 5 × 3 = $1,500

Thus, $1,500 represents the Lifetime Value of a customer.

CLV = LTV × Profit Margin

LTV refers to the Lifetime Value from the equation.

The profit margin is the percentage of revenue that is profit.

Divide revenue by cost of goods sold to calculate profit margin. For instance if the Lifetime Value (LTV) is $1,500 and the profit margin is 20% (or 0.20) multiplying these values gives a Customer Lifetime Value (CLV) of $300.

To increase CLTV;

An organization's Customer Lifetime Value (CLTV) indicates how much revenue it can anticipate from each customer throughout their relationship. CLTV should be a priority for businesses seeking to maximize their existing customer base. Here are some effective strategies;

1. Reward repeat purchases and maintain customer loyalty through loyalty programs like punch cards or frequent flyer programs.

2. Customize customer interactions; Understanding consumer preferences enables tailored offerings and communications.

3. Sell products and premium services to existing customers to boost engagement as loyal customers tend to upgrade or buy items.

Keep your brand top of mind by sending out newsletters, updates, and promotions.

Get customer feedback and improve your products or services to enhance customer satisfaction and loyalty.

Ensure your customer support is friendly, responsive, and easy to access. Keeping customers satisfied requires assistance especially when problems arise.

Implement Subscription Models; Identify and prioritize customers by offering tailored services and exclusive deals to maximize your business potential.

Focus, on Valuable Customers; Maximize the potential of your business by recognizing and giving priority to high-value consumers through personalized services and special promotions.