What is customer lifetime value and how to calculate it?
Dec. 19, 2018, 2:11 p.m.
What is customer lifetime value and how to calculate it? One of the most important metrics that every marketer should know about IS customer lifetime value, CLV (customer lifetime value) or LTV (lifetime value). Customer Life Value (CLV) is the total income from one customer over the entire duration of the relationship with him. In the case when the term of the relationship with the customer is not known in advance, the CLV will be an estimated value that is calculated based on other metrics: average check, average monthly revenue, average number of purchases per customer, the percentage of outflow. The calculation of CLV is most relevant when it is not carried out for all of your customers at once, but for individual segments. Segmentation can be carried out, for example, according to the period of the beginning of relations with the customer, according to the channel of attraction, according to the tariff plan, or using RFM-segmentation. How to calculate LTV? There are several approaches to calculating LTV. There are quite complex and complicated, and there are simple but less accurate. Below are four formulas, each of which has the right to exist. The basic formula LTV = (average sales price) x (average number of sales per month) x (average customer retention time in months) The calculation of LTV on the basis of net profit in the long run and shows the actual profit that the client brings to your company. Here is taken into account the cost of customer service, and the cost of retention, and the cost of attracting, etc. The result is a whole set of calculations based on individual data. The total profit earned from one customer all the time will give you a precise understanding of the profitability of your customers today. Predictive formula Algorithms predicted LTV will give you the opportunity to get a more accurate indicator of LTV due to the forecast of total revenue, which over time will bring you a client. In practice, it can be quite difficult to achieve the necessary conditions, given the ever-changing discounts, etc. There are many ways to calculate a predicted LTV, and many of them are extremely complex and confusing. Below is one of them. LTV = ((T x AOV) AGM) ALT, where T = average number of orders (sales) per month AOV = average receipt ALT = average duration of customer interaction with the company (in months) AGM = share of profit in revenue. It is correct to express LTV as the sum of all future revenues minus all costs for attracting and retaining customers brought to today. Because future income depreciates. However, bear in mind that this formula cannot be completely accurate, as it only gives a forecast.