How to Calculate Customer Lifetime Value

The concept of customer loyalty is nothing new. Companies have long sought ways to retain loyal customers and drive repeat purchases. The challenge is that most companies view loyalty in a financial sense (i.e., the cost of acquiring a new customer). This can be challenging if you’re not tracking your repeat purchasing habits or calculating the value of a new customer for your business. That’s where the calculation of your Customer’s Lifetime Value comes in.

Customer lifetime value (CLV) is a measure of the future profit potential of a customer. To be precise, its the total amount of money a customer is expected to spend with your business, or on your products, during the lifetime of an average business relationship.

CLV Calculation:

[CLV = Average Transaction Size x Number of Transactions x Retention Period]

Let’s say you run a local beverage chain with three locations that have an average sale of $4. The typical customer visits two times per week, 50 weeks per year, over an average of five years.

CLV = $4 (average sale) x 100 (annual visits) x 5 (years) = $2,000

Why is it so Important?
In addition to being a great metric for assessing your customers, CLV can also be used as a benchmark to drive growth. Growth metrics are important because they help you determine if your business is growing at the right pace. If you’re growing at a blazing pace, you risk exhausting your resources and burning out your team. If you’re growing at a slower pace, you risk falling short of achieving your business goals. Calculating your CLV can be a helpful benchmark for both of these growth scenarios. This calculation helps you determine if you’re making the right investments in marketing and customer service.

Key Takeaway

• Customer lifetime value is a metric that can help you better assess the value of your customers and drive growth in your business.
• Calculating CLV involves taking a customer’s Net Promoter Score (NPS) and multiplying it by your average revenue per customer.
• The goal of calculating CLV is to better understand the worth of your customers, not just in terms of revenue, but also in their satisfaction and likelihood to recommend your brand.

References:

• Netsuite.com/blog
• Big-commerce/blog
• Shopify/blog