SERVICE | 1 MIN READ

How to Calculate Customer Lifetime Value

Written by Sophia Bernazzani

How
to
 Calculate
Customer
Lifetime
Value

To
calculate
customer
lifetime
value,
which
predicts
the
total
revenue
a
business
can
reasonably
expect
from
a
single
customer
account,
you
need
to
calculate average
purchase
value,
and
then
subtract average
purchase
frequency
rate
from
that
number
to
determine
customer
value.
Then,
once
you
calculate average
customer
lifespan, you
can
multiply
that
by
customer
value
to
determine
customer
lifetime
value.
Customer lifetime value (LTV) is one of the most important metrics to measure
at any growing company.

By measuring LTV in relation to cost of customer acquisition (CAC), companies

can measure how long it takes to recoup the investment required to earn a new
customer -- such as the cost of sales and marketing.

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And the metric itself tells companies how much revenue they can expect one
customer to generate over the course of the business relationship -- which is
something customer support and success teams have direct influence over.

The longer a customer continues to purchase from a company, the greater their
lifetime value becomes. And customer support reps and customer success
managers, who play key roles solving problems and offering recommendations
that make customers decide to stay loyal to a company -- or to churn.

Customer Lifetime Value Formula

1. Calculate average purchase value: Calculate this number by dividing your company's
total revenue in a time period (usually one year) by the number of purchases over the
course of that same time period.

2. Calculate the average purchase frequency rate: Calculate this number by dividing the
number of purchases over the course of the time period by the number of unique
customers who made purchases during that time period.

3. Calculate customer value: Calculate this number by multiplying the average purchase
value by 1, and subtracting the average purchase frequency rate from that number.

4. Calculate average customer lifespan: Calculate this number by averaging out the
number of years a customer continues purchasing from your company.
5. Then, calculate LTV by multiplying customer value by the average customer lifespan.
This will give you an estimate of how much revenue you can reasonably expect an
average customer to generate for your company over the course of their relationship
with you.

Learn more about calculating LTV across different industries using these case
studies from Kissmetrics in the infographic below. Next, read our guide to learn
more about customer retention.

Save

Save

Originally published Aug 23, 2018 5:06:00 PM, updated August 23 2018

Topics: Customer Retention

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