What is Customer Lifetime Value
Definition: Customer Lifetime Value or CLTV is the present value of the future cash flows or the value of business attributed to the customer during his or her entire relationship with the company.
Description: CLTV is the value a customer contributes to your business over the entire lifetime at your company. It is a very important metric and is used while making important decisions about sales, marketing, product development, and customer support.
By applying Customer Lifetime Value marketing managers can easily arrive at the rupee value associated with the long-term relationship with any customer. It is difficult to predict how long each relationship will last, but marketing managers can make a good estimate and state CLTV as a periodic value.
It is useful metric used by marketing managers especially at a time of acquiring a customer. Ideally, lifetime value should be greater than the cost of acquiring a customer. Some also call it a break-even point.
The basic formula for calculating CLTV is the following (1):
(Average Order Value) x (Number of Repeat Sales) x (Average Retention Time)
For example, let’s say you run a Health Club where customers pay Rs 1000 per month and the average time that a person remains a customer in your club is 3 years. Then the lifetime value of each customer is (according to the formula above):
Rs 1,000 per month x 12 months x 3 years = Rs 36,000. This means each customer is worth a lifetime value of Rs 36,000.
Once we calculate CLTV we know how much the company can spend on paid advertising such as Facebook ads, YouTube ads, Google Adwords etc. in order to acquire a new customer.
Description: CLTV is the value a customer contributes to your business over the entire lifetime at your company. It is a very important metric and is used while making important decisions about sales, marketing, product development, and customer support.
By applying Customer Lifetime Value marketing managers can easily arrive at the rupee value associated with the long-term relationship with any customer. It is difficult to predict how long each relationship will last, but marketing managers can make a good estimate and state CLTV as a periodic value.
It is useful metric used by marketing managers especially at a time of acquiring a customer. Ideally, lifetime value should be greater than the cost of acquiring a customer. Some also call it a break-even point.
The basic formula for calculating CLTV is the following (1):
(Average Order Value) x (Number of Repeat Sales) x (Average Retention Time)
For example, let’s say you run a Health Club where customers pay Rs 1000 per month and the average time that a person remains a customer in your club is 3 years. Then the lifetime value of each customer is (according to the formula above):
Rs 1,000 per month x 12 months x 3 years = Rs 36,000. This means each customer is worth a lifetime value of Rs 36,000.
Once we calculate CLTV we know how much the company can spend on paid advertising such as Facebook ads, YouTube ads, Google Adwords etc. in order to acquire a new customer.
