What is Customer Lifetime Value(CLTV)?

Cross selling and upselling your current customer base is way easier than selling to someone new.

As per general rule of thumb, it is 5 times more costly to acquire a new client than selling to an existing one. And that's not it, your current customers will always be willing to spend more in buying any service than a new customer would. Anyways, a group of loyal customers will always make the major chunk of your revenue over time. When talking in numbers, this would be their Lifetime Value.

What is customer lifetime value?

Customer Lifetime Value is the total estimated revenue a customer is expected to generate over their entire relationship with your business.

The general formula for Customer Lifetime Value = Customer Value X Average Customer Lifespan

1. Customer Value is Average Purchase Value X Average Frequency Rate
   • Average Purchase Value is Total Revenue in ‘X’ Time / Total Number of Purchases in ‘X’ Time
   • Average Frequency Rate is Total Number of Purchases in ‘X’ Time / Total Number of Customers in ‘X’ Time
2. Average Customer Lifespan is Average Number of Years a Customers Stays Active / Total Number of Customers

It is always important to find a right balance between finding the ways to increase the Customer Lifetime Value and Acquiring New Customers.

Why knowing customer lifetime value is important?

1. Strategic Decision Making:
   • CLTV helps businesses make strategic decisions regarding marketing, customer acquisition, and retention strategies.
   • It provides a long-term perspective on customer value, allowing businesses to allocate resources effectively.
2. Resource Allocation:
   • Businesses can use CLTV to determine how much to invest in acquiring new customers versus retaining existing ones.
   • It helps in optimizing marketing budgets by focusing on channels that attract high CLTV customers.
3. Customer Segmentation:
   • CLTV allows businesses to segment their customer base based on value.
   • This segmentation can help tailor marketing strategies and offerings to different customer segments for maximum profitability.
4. Product Development:
   • Understanding CLTV can guide product development efforts.
   • Businesses can create products or services that cater to high CLTV customers, maximizing revenue potential.
5. Retention Strategies:
   • High CLTV customers are valuable assets, and businesses can develop specific retention strategies to keep them engaged.
   • Loyalty programs, personalized offers, and excellent customer service can be tailored based on CLTV insights.
6. Forecasting Revenue:
   • CLTV provides a basis for forecasting future revenue.
   • By understanding the value of the customer base, businesses can predict revenue streams and plan accordingly.
7. Customer Satisfaction:
   • Improving CLTV often involves improving customer satisfaction.
   • Businesses that focus on increasing CLTV tend to also enhance the overall customer experience, leading to happier and more loyal customers.
8. Competitive Advantage:
   • Businesses that effectively leverage CLTV have a competitive advantage.
   • They can optimize their operations to maximize long-term profitability and sustainability.

What are the different types of CLTV calculation methods?

There are 4 major formulas to measure different types of CLTVs:

1. Gross CLTV
2. Net CLTV
3. Traditional CLTV
4. Adjusted CLTV

Each of the four methods for calculating customer lifetime value can offer valuable insights to your marketing and sales teams. It's important to assess your revenue model and understand the data available to you before choosing an LTV calculation approach.