CLTV stands for Customer Lifetime Value. It is a metric that looks at the net benefit of each customer.
Sergio Vergara
Sergio Vergara
October 13, 2023 — 3 minutes reading time
What is CLTV?
Photo by Christiann Koepke on Unsplash
CLTV works as a predictive tool to calculate the future effective latvia mobile numbers list benefit a consumer will generate during their lifetime as a customer.
It allows you to reasonably predict how much revenue a customer will bring in over the estimated average length of time they will remain a customer.
It is necessary for the company to determine the average “lifespan” of a customer in order to perform the CLTV calculation. Customer lifetime can tell a lot about a company, and naturally, a longer lifespan is generally preferable.
Factors contributing to CLTV
Determining how much a customer will contribute in revenue to a company during their time as an active customer is, understandably, a bit tricky. There are several different calculations that need to be done before making a formula to estimate CLTV. These include:
1. The average lifespan of a customer
This can be tricky for businesses just starting out. For more established businesses, taking into account the average number of years their customers remain active and dividing it by the total number of customers over those years will provide a good indication of the average lifespan.
2. The average frequency of purchases
How often does the customer make a purchase? If the business offers products that are purchased frequently (a coffee shop, for example), the frequency is likely to be higher than for a monthly subscription-based online service. The number of visits/purchases is the frequency.
3. The average purchase value
In order to understand how much a customer will spend over time, it is essential to find the average of what they spend on a regular purchase. This can be determined by dividing the total amount a customer spends during a given time by the number of purchases during that time.
4. The average value of a customer
This element determines how much a customer will spend on average in a given period as an active customer. For example, if a business receives customers regularly, such as every week or every day, they could use the time period and multiply it by the amount spent each time.
How to calculate CLTV?
With the above information listed, there is a fairly simple equation that allows for a quick calculation of CLTV:
CLTV = Average Customer Value / Average Customer Lifetime