How to Calculate Customer Lifetime Value (CLTV or CLV)

Customer Lifetime Value (CLTV or CLV) is a metric that estimates the net profit a business expects to generate from a customer over the entire duration of their relationship with the company. It helps organizations understand the long-term value of acquiring and retaining customers, enabling them to make strategic decisions regarding customer acquisition, retention, and loyalty.

To calculate Customer Lifetime Value, you can use the following formula:

CLTV = (Average Purchase Value) x (Purchase Frequency) x (Customer Lifespan)

Here’s how to calculate each component:

Average Purchase Value:

This refers to the average amount of money a customer spends per transaction. To calculate this, sum up the total revenue generated from a customer over a given period and divide it by the number of purchases made during that period.

Average Purchase Value = Total Revenue / Number of Purchases

Purchase Frequency:

This indicates how often a customer makes a purchase within a specific timeframe. To calculate this, divide the total number of purchases by the total number of unique customers during that period.

Purchase Frequency = Total Number of Purchases / Number of Unique Customers

Customer Lifespan:

This represents the average duration of the customer’s relationship with the company. It can be calculated by taking the time from the customer’s first purchase to their last purchase (or the present time if they are still an active customer) and dividing it by the total number of customers.

Customer Lifespan = Sum of (Last Purchase Date — First Purchase Date) / Number of Customers

Once you have calculated the Average Purchase Value, Purchase Frequency, and Customer Lifespan, you can multiply these values together to calculate the Customer Lifetime Value.

It’s important to note that CLTV calculations can be more sophisticated and may involve additional factors, such as discount rates, customer acquisition costs, and customer churn rates. These additional factors can provide a more accurate and comprehensive understanding of the customer’s value to the business.

Furthermore, CLTV is a dynamic metric that can be analyzed at different segments or customer cohorts to gain insights into variations in customer behavior and profitability.