Customer Lifetime Value definition – Customer Lifetime Value (also known as CLV or LTV) is an estimation of the amount of revenue a customer will generate over the course of their relationship with your brand. It is a highly useful method eCommerce marketers use to estimate marketing costs and analyze an acquisition strategy.
Customer Lifetime Value Formula
On a basic level, lifetime value calculation is as follows:
(Average value of a sale) X (# of repeat transactions) X (average retention time in months or years)
To illustrate, if a health club member spends $45 each month for five years, the Customer Lifetime Value of that customer would be 45 x 12 x 5= $2700 or $540 a year.
A more advanced formulation to calculate Customer Lifetime Value is: t(52 x S x C x P), where (t) is the average customer lifespan, (S) the average customer expenditure per visit, (C) the average number of visits per week, (P) the average profit margin per customer.
Customer Lifetime Value Example
If the CLV of an average customer is $6,000, and the CLV of a valuable customer is $10,000, by subtracting the two you might expect to pay $4,000 to acquire a valuable customer.
The Importance of Customer Lifetime Value
An effective way for eCommerce marketers to gauge a valuable customer vs. an average customer is by segmenting different audiences and calculating Customer Lifetime Value according to total purchases made over a long time period (six months to a year). Doing this will not only set a baseline CLV for comparison with new customers but will separate the heavier hitters from customers who made a one-off or minimal amount of large purchases. Using this method, marketers can engage heavy spenders with real-time personalization and 1:1 messages to increase conversions and revenue metrics such as Average Order Value.