What Is The Customer Lifetime Value And How To Calculate It?

The CLTV stands for Customer Lifetime Value. 

Plain and simple, the CLTV is all about the net profit you expect (rather than hope) to earn by maintaining a business relationship with your customer(s). Why is it important to know your specific customer’s lifetime value? Well, this “prediction” has to answer one very important question for your business. 

Is a given customer worth my time, money, and resources?

Let’s Do Some CLTV Math 

Deep down inside every business owner knows where and how to invest. There are entrepreneurs who haven’t even heard about the CLTV, but they apply it on a daily basis unmistakably. 

In case, you want to compare what your entrepreneurial gut and the numbers behind the CLTV tell you, here are a few useful formulas to calculate your customer lifetime value. 

Here’s one to get you straight to the customer lifetime value point:

 

CLTV 

(Purchase Frequency) X (Average Order Value)

___________________________________

Average Customer Lifetime

 

What if your business is based on a subscription model? If that’s the case then you should try this one:

 

CLTV 

(Gross Revenue) – (The Total Cost of Goods Sold)

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The Initial Number of Unique Customers

 

As you can see, calculating your CLTV isn’t rocket science. However, if you want to get more useful results, then you have to do the math a bit more thoroughly. 

Calculating CLTV More Accurately And Specifically 

We sure hope that this precise CLTV formula won’t scare you away:

 

CLTV 

(Profit Margin Per Customer) X (Average Customer Lifetime) X ((Purchase Frequency X Average Order Value))

X

Customer Retention Rate

________________________

(Discount – Retention Rate) + 1

 

It’s worth emphasizing that Customer Lifetime Value is so much more than a math formula and a few numbers you get as a result. The main purpose of this term is to make you think and prioritize where and how you’re going to spend the money and resources on your customers. 

Now that you know what the CLTV is and how to calculate it, you can avoid the worst business case scenario. Can you guess what it could be? The total value of your spendings on customers shouldn’t exceed the net profit they’re bringing in for your business. As simple as that. 

The next question you should challenge your business with is, how to increase your CLTV?