What is Customer Lifetime Value?

Customer lifetime value (CLV) is a financial metric that represents the total value that a customer is expected to generate for a company over the course of their relationship. It is typically calculated by estimating the amount of revenue that a customer is expected to generate and the length of time over which they are expected to generate it, and then discounting that amount to present value.

CLV is an important metric for companies, as it helps to inform business case decisions about how much to invest in customer acquisition and retention efforts. A high CLV indicates that a customer is likely to be profitable over the long term, while a low CLV may indicate that a customer is not likely to generate significant value for the company.

CLV is often used in conjunction with other metrics, such as customer acquisition cost (CAC), to assess the profitability of acquiring new customers. By comparing CLV to CAC, a company can determine whether the business case investment in acquiring new customers is likely to be recouped over the lifetime of the customer relationship. It is also used to prioritize customer retention efforts and to inform decisions about pricing and product development.

How to calculate LTV

To calculate customer lifetime value (LTV), you will need to estimate the amount of revenue that a customer is expected to generate over the course of their relationship with your company, and the length of time over which they are expected to generate it. You will then need to discount that amount to present value using a discount rate that reflects the time value of money and the required rate of return on the investment.

Here is the formula for calculating LTV:

LTV = (Average Revenue per Customer) * (Average Customer Lifespan) / (Discount Rate)

To use this formula, you will need to determine the following:

• Average revenue per customer: This is the average amount of revenue that a customer is expected to generate over the course of their relationship with your company. It can be calculated by dividing the total revenue generated by the number of customers.

• Average customer lifespan: This is the average length of time that a customer is expected to remain a customer. It can be calculated by dividing the total number of customer years by the number of customers.

• Discount rate: This is the rate at which the future cash flows are discounted to present value. It should reflect the time value of money and the required rate of return on the investment.

Once you have determined these values, you can plug them into the formula to calculate LTV. It is important to note that LTV is a forecast and is based on a number of assumptions, and the actual value may differ from the forecast.