Calculate Your Customer Lifetime Value

The single most important metric for understanding your customers

What is Customer lifetime value (or CLTV)?

Customer lifetime value (or CLTV) measures the profit your business makes from any given customer. CLTV is the single most important metric for understanding your customers. CLTV helps you make important business decisions about sales, marketing, product development, and customer support. For example:

• Marketing: How much should I spend to acquire a customer?
• Product: How can I offer products and services tailored for my best customers?
• Customer support: How much should I spend to service and retain a customer?
• Sales: What types of customers should sales reps spend the most time on trying to acquire?

How do you calculate Customer Lifetime Value?

When calculating CLTV there are many nuances to consider based on the specific questions you want answered. The most straightforward way to calculate CLTV is to take the revenue you earn from a customer and subtract the money spent on acquiring and serving them.

Estimate your Customer Lifetime Value

Performing in-depth customer lifetime value analysis is time-consuming. Here's an example to give you a back-of-the-envelope estimate:

Let's say that the value of an average order at your business is $50. Also, anytime someone makes an order, whether it's their first or their third, they have a 10% chance of coming back and making a repeat purchase. Finally, let's assume that it costs you $15 to acquire each new customer.

The total revenue you can expect to get from each customer is your average order value divided by one minus the repeat purchase rate, or $50 / ( 1 - 0.1) = $55.56. Subtract your customer acquisition cost from that, and you get a customer lifetime value of $40.56.

How to predict your Customer Lifetime Value

CLV can be calculated historically, over specific time periods, or it can be predictive. Each of these calculations serves different purposes. Predictive CLTV is the most powerful way to not only understand what a customer is worth to you now, but also see how their value will change over time.

Let's look at an example for the ecommerce industry. Here's a chart that shows CLTV benchmark data from nearly 200 ecommerce companies. In this chart we're looking at the most basic form of CLV. It has a single input, sum of all purchases, and closed time parameters, 365 days.

On day one, customers with the highest lifetime values have already distinguished themselves. This means marketers don't need to wait long to make important invest-or-kill decisions about their marketing campaigns. CLV is the best metric to predict future customer behaviors.

Improve your Customer Lifetime Value

Improving your Customer Lifetime Value can have a dramatic impact throughout your business. Let's see how the estimate we calculated above would change with an improvement to the underlying assumptions.

Improve Average Order Value

Improve Repeat Purchase Rate

What should your Customer Lifetime Value be?

Only your data can tell you what your Customer Lifetime Value should be. If you need help extracting insights on CLV from your existing data, get in touch. Stitch is a data consolidation tool that that makes it easy for online companies to build their data infrastructure, calculate CLV, and get a 360-degree view of their business.