Customer Lifetime Value

CLTV
• value a customer contributes to your business over the entire lifetime at your company

• prediction of the net profit attributed to the entire future relationship with a customer

• It is useful metric used by marketing managers especially at a time of acquiring a customer

• The basic formula for calculating CLTV is:

(Average Order Value) x (Number of Repeat Sales) x (Average Retention Time)

• The longer a customer continues to purchase from a company, the greater their lifetime value
becomes.
 Simple CLV Calculation
• For example, In a Health Club, customers profit per month is Rs 1000 and the average time that a person
remains a customer in the club is 3 years.

• Lifetime value of each customer is:

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.

 Simple CLV Example 2
• Customer lifetime value, is the average amount of money your customers will spend on
your business over the entire life of your relationship, minus any money you spent to
acquire that customer.

• You spend $5 in advertising to attract a customer. He or she buys an average of 7 pairs of

socks every year for 10 years. Your profit margin on each pair of socks is $10.

• profit per year from the customer is $70, which works out to $700 over the decade.

• Subtract the amount of money you spent to acquire the customer, which results in a net
customer lifetime value of $695.
The Traditional CLV Formula
• allows for fluctuations in customer revenue over time and each year is adjusted by a
rate of discount to account for inflation

Where GC is yearly gross contribution per customer,

r is yearly retention rate,
d is yearly discount rate
 Traditional CLV Example
• Average Customer Spend / month = $100
• Average Customer Lifespan = 12 months
• Margin = 15%
• Discount Rate = 10%
• Retention Rate = 60%

Average Gross Margin Per Customer Lifespan = Average Customer Lifespan X (Average Customer Spend X Profit
Margin)
GC = 12 * (100 * 0.15) = 12 * 15 = $180
CLTV = $180 * (0.60 / (1+ 0.1 – 0.6) = 180 * 1.2 = $216
Benefit of CLV
• 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

• Also retaining existing customers through email marketing, SMS marketing, social
media marketing, etc.
Customer retention formula