By Jake Hugo
Customer lifetime value (CLV) is an important concept in business. It measures how much revenue a customer will generate throughout their relationship with your company. While there are many ways to calculate CLV and it’s an ever-changing measure, the overall idea is simple: the more money customers spend with you, the higher their CLV. Understanding your customer lifetime value can help inform your marketing strategy and guide product development efforts—because, at the end of the day, you never want to overspend on acquiring new customers or undervalue existing ones.
What is the customer lifetime value?
Customer lifetime value (CLV) is a metric that measures the total amount of revenue generated by a customer in their relationship with you. It’s calculated by multiplying the average spend per transaction by the number of times they buy from your business over time.The value of each customer varies depending on where they’re located and how much money they spend.
A new customer costs more than an existing one because it takes time to create rapport with them and get them to buy from your company again, so you need to factor this into your calculations when estimating CLV. Also, customers who are repeat purchasers tend to spend more than those who only make a single purchase because their loyalty increases over time as well as trust in both you and the quality of products/services offered.
How to calculate the lifetime value
To calculate a customer’s lifetime value, you’ll need to use a cohort analysis. A cohort is defined as a group of people who share common characteristics and experiences. In this case, it will be the customers in your business at any given time.
Once you’ve identified your cohorts, add up the total revenue per cohort (how much money was made from this group) and then add up their total costs (how much money was spent on them). The final step is to divide total revenue by total cost: this gives you an average profit per customer or “customer profit.” This number is useful because it allows us to evaluate how much each customer is worth by comparing their profit margin against other metrics such as acquisition costs or lifetime value estimates.
Customer lifetime value vs. customer acquisition cost
To calculate your LTV, you’ll need to know the number of customers purchased in the past 12 months and their average lifetime value. This is a great way to gauge whether or not you’re getting enough value from each customer since it gives you insight into how much money they are contributing over time.
Businesses that sell products or services should compare their average customer lifetime value with their customer acquisition cost (CAC). If these numbers don’t match up—if it costs more for a business to acquire new customers than those customers bring in over time—then there may be problems with the company’s marketing strategy or product pricing structure.
Why LTV matters in business
As you can see, LTV is important to businesses in many ways. If a company wants to be profitable, it must understand the lifetime value of its customers—and then make smart decisions based on that knowledge.
When calculating customer lifetime value, you’ll need to take into account a variety of different factors: how long customers typically stay with your business; what they spend during each visit; their average order size; and so on. Once you have analyzed these factors and estimated the average purchase price per user over time, you can use this data as a basis for forecasting future revenue streams.
Conclusion
The lifetime value of a customer is an important metric to measure and optimize, but it should not be the only one. It can help you understand how much each customer is worth to the business but other metrics are more important such as revenue per user (RPU) and churn rate. If a company has been able to grow faster than its LTV has increased, then it’s likely that its overall revenue growth has exceeded its CAC growth as well.
