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Calculating customer lifetime value

The customer is everything when you’re running a business, but keeping a new customer is just as important as gaining one in the first place. That’s where customer lifetime value (CLV) comes in. Learn more about this important metric and how to calculate customer lifetime value below.

What is customer lifetime value?

Customer lifetime value (CLV) describes how valuable your customer is to your business, not just based on a one-time purchase but over the course of their relationship with your business. The longer you manage to keep a customer and build their loyalty, the more valuable they will become. Failing to provide an adequate customer experience and customer service will severely impact CLV and can lead to high levels of churn.

CLV vs. CAC vs. CAS

Customer lifetime value goes hand in hand with customer acquisition cost (CAC) which refers to the money needed to attract a customer in the first place. CAC considers things like:

  • Advertising costs

  • Marketing costs

  • Inventory

If it costs £1000 to gain 1000 customers via marketing efforts, your CAC is £1. The CLV and CAC influence each other, so even if a customer’s CLV is extremely high, a high CAC may indicate that they may not be as valuable as they first appear.

How to calculate customer lifetime value

The following customer lifetime value calculation methods can help you determine a customer’s worth to your business.

1. Work out average purchase value

This can be done with the following calculation:

Company Revenue / Total Number of Purchases in Same Period

2. Calculate purchase frequency

This can be done by choosing a time period and dividing the total purchases by your total unique customers:

Number of Purchases Made in a Time Period / Unique Customers in Same Time Period

3. Calculate customer value

In order to do this, you should multiple the average purchase value by the frequency average:

Average Purchase Value x Average Purchase Frequency

4. Find the average customer lifespan

You can do this by looking at your customer base and finding the average number of years they spend as a customer of your brand:

Total Customer Lifespans / Number of Customers

5.  Calculate customer lifetime value

Use the customer lifetime value calculation to reach a final figure:

Customer Value x Customer Lifespan = CLV

Other things to look out for

Another important area you should keep an eye on is customer satisfaction. This isn’t as easy to figure out using a simple calculation, so you will need to look at your customer reviews and communications. The rate at which you acquire repeat customers is also a strong clue as to whether you’re delivering an experience that customers want to revisit.

You should also make sure you’re doing what you can to boost customer retention, as keeping a customer is far more profitable than gaining a new one. There are several ways you can do this. Whether its email marketing, exclusive offers to existing customers, or just having a highly active social media presence, the key to keeping a customer for a lifetime is to be an omnipresent factor in their life.

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