What is Customer Lifetime Value?
Customer Lifetime Value (CLV) is a metric used to determine the total value a customer will generate for a business over the entire lifetime of their relationship. It is an important metric for businesses to track because it helps them to better understand the profitability of their customers and optimize their marketing and sales activities.
How to Calculate Customer Lifetime Value
There are several different methods to calculate CLV, but the most common formula is:
- CLV = Average Transaction Value x Average Number of Transactions x Average Customer Lifespan
The Average Transaction Value is the average amount of money a customer spends in a single purchase. The Average Number of Transactions is the average number of purchases a customer makes over their lifetime. The Average Customer Lifespan is the average amount of time a customer remains a customer of your business.
Examples of Customer Lifetime Value
For example, let’s say you own a clothing store and the average transaction value is $50, the average number of transactions is 4, and the average customer lifespan is 12 months. In this case, the CLV of each customer would be $200. Another example might be a subscription-based business like a streaming service. In this case, the Average Transaction Value would be the monthly subscription fee, the Average Number of Transactions would be the total number of months a customer remains subscribed, and the Average Customer Lifespan would be the total time a customer remains subscribed.
Conclusion
Customer Lifetime Value is an important metric for businesses to track because it helps them to better understand the profitability of their customers and optimize their marketing and sales activities. By understanding and calculating CLV, businesses can make more informed decisions about how to allocate their resources in order to maximize their returns.