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Digital Marketing

Lifetime Value Calculation: What It Is and How to Measure It

By October 27, 2021November 20th, 2023No Comments

lifetime value calculation76% of companies identify their lifetime value calculation as one of the many important concepts for the success of their business. By giving them information about their current customers, these lifetime value calculations can help business owners produce smarter marketing and sales choices.

No matter what kind of business you’re running, customer lifetime value matters. Collecting this kind of data gives insight into the retention rate for your customer base. In turn, you can utilize the data to reach the right customers and produce larger sales.

To learn about what customer lifetime value is and why it’s important, keep reading.

What Is Customer Lifetime Value?

Customer lifetime value, or – simply – lifetime value, indicates the total revenue that a business can expect from a single customer account throughout the entirety of the business relationship with that customer. To gather this kind of information, the metric compares a customer’s revenue value to the predicted lifespan that your company has with that customer.

Some refer to customer lifetime value as CLTV, while others indicate lifetime value as LTV. All of these phrases and acronyms represent the same thing.

Businesses utilize this measurement to identify and target customer segments that bring the highest financial value to the company. The business may identify this in two ways:

  1. The customer segment may show a long-term promise, meaning that they are going to have a longer relationship with the company than other customer segments may have
  2. The customer segment may show a larger financial value, meaning that they are likely to spend a greater amount of money on the company regardless of the length of the relationship

In either scenario, the company is likely to bring in a larger amount of money. Ideally, the customer segments will show promises in financial factors as well as time factors. Since each one increases the revenue of your company, both are great indicators of customer segment promise.

Customer support and success teams have a direct influence on each on of your customer segments. In turn, they have a direct influence on the customer lifetime value. Each personnel member can encourage larger sales or reduce sales.

Consequently, customer representatives play critical roles in the production of the final lifetime value calculation. As you learn about the calculation itself, you can understand how tracking this metric may help customer support teams increase customer loyalty to the business while reducing churn rates for those same customers.

Why Is Customer Lifetime Value Important?

Understanding the customer lifetime value calculation is crucial. In order to put the metric to work, managers should understand how it affects their business and how their business affects it.

First, each business should know that the customer lifetime value directly affects business revenue. The CLTV metric calculates for and identifies the customers that contribute higher sales to the business. With this information, companies can understand what kinds of products these customers are buying and promote them.

By looking at customer spending trends, managers will be able to track down and take advantage of the products and services that are doing the best with their customers. Accordingly, the business will be giving the customers what they want while the business brings in a larger amount of money.

Second, due to the focus on customers’ wants, the customer lifetime value has the ability to help boost customer loyalty and retention. If your business takes advantage of the CLTV calculation, it’ll be able to form excellent customer support systems.

The customer lifetime value metric is all about learning about the customer base and how to better serve them. Consequently, the metric is going to inherently create better customer relationships.

Moreover, businesses can increase their customer loyalty and customer retention metrics. Hereby, you’ll produce a lower churn rate and an increase in sales.

How to Calculate Lifetime Value

If you’re ready to start calculating customer lifetime value, you need to understand a few things about your business.

First, calculate the average purchase value. Then, multiply that number by the average number of purchases. The resulting number is the customer value.

Thus, multiply the customer value by the average customer lifespan that the business has. That answer is the customer lifetime value.

In summation, here are the equations any manager needs:

Customer Value = Average Purchase Value * Average Purchase Frequency Rate

Customer Lifetime Value = Customer Value * Average Customer Lifespan

If you’re unsure how to find or calculate these numbers, we’ll break it down even further:

  • Average purchase value equals total revenue divided by the number of orders
  • Average purchase frequency rate equals the number of purchases divided by the number of customers
  • Average customer lifespan equals the sum of customer lifespans divided by the number of customers

With all of this data, businesses can understand their customers better than ever. In turn, you’ll be able to create better decisions about your marketing and sales strategies in the future.

How to Take Advantage of Your Lifetime Value Calculation

Now that you’ve calculated the business’ lifetime value, it’s time to figure out exactly how to take advantage of it. Unfortunately, this is the part that many businesses do incorrectly.

When it comes to this kind of metric, managers tend to rush the results. In order to know whether or not your new marketing and sales tactics are working, you need to wait a few months to calculate your new customer lifetime value calculation.

Accordingly, you can compare the new calculation to the previous one. By trending the metrics over time, you can figure out what’s working for the business and what isn’t working for the business.

The Right Kind of Marketing for Your Customers

Understanding the lifetime value calculation is pertinent to each business’ success. However, it’s even more important to be able to utilize the calculation to better each business’ marketing and sales techniques.

Our team at VujaDay creates marketing strategies for businesses just like yours that are looking to find the right customers while using the right marketing techniques. Check out our marketing services today and get started!