Enter the customer value per year or time period and the average customer life span into the calculator to determine the customer lifetime value.
Customer Lifetime Value Formula
The following formula is used to calculate the customer lifetime value.
CLTV = CV * ALS
- Where CLTV is the customer lifetime value
- CV is the customer value per year or time period
- ALS is the average life span in years or time frequency
Customer Lifetime Value Definition
A customer lifetime value is the total value or expected amount of revenue that is generated by a customer of their lifetime.
Why is customer lifetime value important?
Understanding a customer lifetime value is important in several different ways. First, a customer lifetime value is used as the basis for understanding how profitable a company can be long term. If you can estimate the average number of customers and the value of those customers over their life, you can estimate the total revenue that you’re company can expect to earn.
From this information a company can then set up there marketing structure to account for the lifetime value of acquiring a new customer. For example, if it costs $10.00 on average to acquire a customer, but the lifetime value of the customer is $50.00, then the cost of acquiring the customer is worth the cost.
How to increase a customer lifetime value?
One of the best ways to increase the lifetime value of a customer is to increase the average time a customer spends with a company. This is done by improving customer service, product engagement, and any other metric that will benefit the customer. If this can be done without dramatic increases in cost, the net result is more profit long term for the company.
Other ways to increase a customer lifetime value is to get customers to purchase other products offered by your company, increase the price of a service, and try to convince customers to upgrade to higher tier services.
Can a customer lifetime value be predicted?
A customer lifetime value can be predicted using historical metrics and industry data from other companies from similar products. For example, if your company offers a streaming services, and their is data on another company that offers a streaming service you can estimate your CLV using their data as a basis.
What is a good customer lifetime value?
A good customer lifetime value depends on the type of service or product being provided. A better metric to compare would be the total amount of a time a customer stays with a company. The longer the lifetime of the customer the better in all cases no matter what the service is.
Customer Lifetime Value Example
The following is an example of how to calculate the customer lifetime value.
How to calculate customer lifetime value?
- First, calculate the average customer value.
For this example, we will be using the average customer value over a 1 year period. After analysis we find this to be $100.00.
- Next, determine the average lifespan.
Determine the average length of time a customer spends with the product. For this example we assume we have loyal customers and they stay on average for 10 years.
- Finally, calculate the CLTV.
Using the formula above, we find that the CLTV is equal to $100.00/year * 10 years = $1,000.00.
A customer lifetime value is the total value of a customer on average over the lifespan of that customer. In other words, how much value can be extracted from a customer over the life of that customer. In this case the life of the customer is the time spent purchasing and using a service or good/
The average value per customer is typically measured as the total money spent by the customer over a given time period.