Customer lifetime value is one of the most important metrics on which you should fully focus. Its importance can help you grow your business, and prevent losing customers.

In this article, you will find the last piece of the puzzle and everything you know regarding this topic. Including the customer lifetime value formula and the customer lifetime value calculation!

Let’s get started, shall we?

What does customer lifetime value stand for?

Although there are numerous ways to define the meaning of customer lifetime value, the most self-explanatory you can get is that the Customer lifetime value (CLV, or CLTV) is a metric that indicates the total revenue a business can reasonably expect from a single customer account throughout the business relationship.

If we dive a bit deeper, this metric gives you a clear picture of how much revenue a customer brings to the company. In the long run, knowing this, companies can identify the segments which offer the greatest value to the company.

Aside from this, companies can also implement new or update their existing strategies to maintain their business relationships with customers.

After all, the stronger the business relationship and customer experience are, the better the outcomes will always be.

Why customer lifetime value is important for your business?

Since you already have an insight into what does clv stands for, now is the right time to understand more about its importance.

Improves customer loyalty and boosts customer retention

If your business optimizes its strategy and focuses on the customer lifetime value, you’re on a good way. Why? Because your customers will unlikely churn.

Loyal customers are every business` dream because if there aren’t loyal customers, the business itself will likely fail. Loyal customers are the ones who write positive reviews, increase your sales, and are your biggest brand advocates out there.

Helps you target your “perfect” customers

Do you know how much money does your ideal customer spends with your business? If you didn’t make an analysis, well, you may face hard challenges.

The benefits of knowing all this information is essential. That’s why businesses tend to spend a lot of time on this metric. It simply gives you the greater picture you’re missing.

Lower customer acquisition costs

According to the European Business Review, customer acquisition costs 5x more when compared to retention. This is huge.

Or, with other words, it is more expensive to find new customers rather than nurture the existing ones.

Why? Because your average customer already knows you. You won’t have to spend a fortune on multiplying their numbers.

This doesn’t mean that you shouldn’t, though.

What’s the customer lifetime value formula?

In order to calculate the customer lifetime value, you need 2 things. These are the customer value and the average customer lifespan.

Or, CLV = (Customer Value * Average Customer Lifespan).

However,  don’t rush. Take your time until you get more data.

Namely, you will need data regarding the:

• Customer Value (this is the average purchase frequency * average purchase value)
• Average Customer Lifespan (average length of time where your customer keeps spending money on your business)
• Average Purchase Value (this is the sum of all customer purchases given a specific period of time). Once you know this, divide these numbers with the purchases made during that period.
• Average Purchase Frequency ( this is the average number of transactions per customer over a given period of time)

So, once you determine the average customer lifespan and the average customer value, you’re able to calculate CLTV.

Conclusion

To summarize, CLTV is a truly important metric that can help you see the bigger picture. If you put a great focus on it, success will be imminent.

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