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How CLTV Is Calculated

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 Customer value per year
= Average order value in the last year[1] x Average purchase frequency in the last year[2]

CLTV
= Average Customer value per year x Customer lifespan[3] x Gross Margin[4]

  1. Average order value in the last year = Revenue / no. of orders

  2. Average purchase frequency in the last year = Number of orders / unique customers

  3. Customer lifespan = first to last purchase in years

  4. Gross Margin % = (Revenue – Cost Of Goods Sold) / Revenue

CLTV Best Practice

There are a number of tactics you can use to increase the CLTV:

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.