How do you calculate CLV?
CLV, or Customer Lifetime Value, is a metric that estimates the total value a customer will generate over their entire relationship with a business. It helps businesses understand the long-term profitability of their customer base.
To calculate CLV, you can use the following steps:
Determine Average Purchase Value: Calculate the average amount of money a customer spends on each purchase. This can be done by dividing the total revenue generated from customers by the total number of purchases.
Determine Average Purchase Frequency: Calculate how often, on average, a customer makes a purchase within a specific time period. This can be done by dividing the total number of purchases by the total number of customers.
Determine Average Customer Lifespan: Estimate a customer's relationship duration with the business. This can be calculated by analyzing historical customer data or making an educated estimate based on industry benchmarks and customer behaviour.
Apply the Formula: Multiply the Average Purchase Value by the Average Purchase Frequency, and then multiply the result by the Average Customer Lifespan.
The formula for calculating CLV is as follows:
CLV = Average Purchase Value * Average Purchase Frequency * Average Customer Lifespan
For example, if the Average Purchase Value is $50, the Average Purchase Frequency is 2 purchases per year, and the Average Customer Lifespan is 5 years, the calculation would be:
CLV = $50 * 2 * 5 = $500
Therefore, the Customer Lifetime Value in this example would be $500.
CLV helps businesses understand the long-term value and profitability of their customer relationships. It provides insights into the revenue potential of customers and allows businesses to make informed decisions about customer acquisition, retention strategies, and marketing investments. By optimizing CLV, businesses can focus on acquiring and retaining high-value customers, maximizing customer lifetime revenue, and improving overall profitability.
