Customer Lifetime value (CLV), which is also called Customer Lifetime revenue (CLR) and Lifetime Value(LTV), helps businesses assess the overall value of a customer over the course of the relationship. It is a measure of the profit that a company can expect from a client over the course of their relationship with the business.
CLV helps businesses to understand the long-term profitability and impact of acquiring and keeping customers. Knowing the lifetime value of customers allows a business to make informed decisions regarding marketing strategies, customer retention, and customer service investment.
Companies consider several factors when calculating the Customer Lifetime value, including:
- Average Purchase Value (AVP): This is the average amount that a customer will spend on a purchase.
- Purchase Frequency (or frequency of purchases): The number of times a customer buys a product within a specified time frame.
- Customer Lifespan (CLV): This is the average length of time that a customer has been associated with a company.
- Gross Margin is the difference between revenue and cost of goods sold.
The formula used to calculate CLV can differ depending on the type of business and data available. The formula that is most commonly used to calculate CLV is:
CLV = Average Purchase Value x Purchase Frequency x Customer Lifespan x Gross Margin