What is Customer Lifetime Value (CLTV)?
CLTV tells you how much revenue you are getting from a customer or segment of customers over the course of your business relationship. The longer a customer continues to purchase from you, and the more they spend, the greater their lifetime value becomes.
How can you use CLTV
You can use CLTV to track the revenue from customers over time, identify segments that are the most valuable to your brand and develop tactics for improving the value and length of your customer relationships.
You can also use the CLTV to measure how long it takes to recoup the investment required to earn a new customer by comparing this to your Customer Acquisition Costs (CAC).
How do we calculate CLTV
Using your transactional data for every customer we work out their CLTV and then use this to work out the average CLTV for each of your RFM segments. We work this out using the following equation:
Average order value in the last year¹ x Average purchase frequency in the last year²
= Average Customer value per year
Average Customer value per year x Customer lifespan³ x Gross Margin⁴ = CLTV
- Average order value in the last year = Revenue / no. of orders
- Average purchase frequency in the last year = Number of orders / unique customers
- Customer lifespan = first to last purchase in years
- Gross Margin % = (Revenue – Cost Of Goods Sold) / Revenue
CLTV Best Practice
To increase the CLTV you can use a number of tactics:
To increase the average order value
- Create special discounts for high shopping cart values
- Establish a free shipping threshold
- Provide bulk discounts
To increase the purchase frequency
- Send post-purchase emails with product recommendations
- Include rewards in your product’s packaging to encourage repeat purchases and in post-purchase emails/on-site messaging
- Send replenishment email journeys
- Offer subscriptions
To increase the gross margin
- Maintain or reduce the cost of goods sold as revenue grows. The lower the cost of goods sold, the more revenue will be realised. Cost of goods sold are costs directly attributable to providing the product or service.
To increase the customer lifespan
- To grow the lifespan, invest in lowering your churn rate by focusing on customer experience and responsiveness.
To find out how you can apply these tactics to your business and for further advice, contact your Customer Success Manager.