How to Calculate Customer Lifetime Value (CLV)
Customer lifetime value is the total amount a customer will spend from acquisition through the end of the relationship with a business.
The Simple Customer Lifetime Value Formula
Customer lifetime value is the total amount of money that a customer will spend from acquisition through the end of the relationship with a business. The customer lifetime values metric is used for a variety of marketing and analytical purposes. Many different formulas of varying complexity are used today to measure lifetime value.
The simplest formula for measuring customer lifetime value is Customer Lifetime Value = Average Total Order Amount * Average # Purchases Per Year * Retention Rate. In other words, customer lifetime value is the average order total multiplied by the average number of purchases in a year multiplied by average retention time in years. This provides the average lifetime value of a customer based on existing data. This information can be used with data from certain segments to better target retention and promotional efforts. It also provides a data point for use during customer segmentation.
Measuring CLTV with Revenue and Margins
Some companies determine lifetime value using the actual amount of money a customer has spent. A popular alternative is to calculate the lifetime value based on margins to arrive at gross figures. This is often done by figuring out the average margin on products and adjusting the order totals appropriately. This provides a more accurate lifetime value in relation to profits.
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How to Calculate Acquisition and Marketing Costs
Many complex customer lifetime value formulas deduct acquisition and marketing costs from the final total. Acquisition costs are calculated by dividing all expenses related to acquisition by the number of new customers gained during the same period. Deducting acquisition costs is useful for planning acquisition strategies and for measuring the success of different campaigns.
A DIY Approach to Calculating Customer Lifetime Value
If you want to forecast customer lifetime value yourself (without using a sophisticated application such as Optimove), check out our blog post, DIY Hack: How to Calculate Customer Lifetime Value.
Optimove’s Customer Lifetime Value Maximization Software
Optimove combines predictive customer modeling and advanced multi-channel campaign automation technologies to help businesses maximize customer loyalty, retention and lifetime value. Contact us today – or request a Web demo – to learn how you can use Optimove to convert more customers, increase the spend of existing customers and reduce customer churn.