How Customer Lifetime Value Is Calculated
Businesses typically use a formula to calculate lifetime customer value that factors in average purchase value, purchase frequency and customer lifespan.
- Average Purchase Value: This is calculated by dividing total revenue by the number of purchases made during a specific period. It tells you how much a customer typically spends per transaction.
- Purchase Frequency: This measures how often a customer makes a purchase. It’s calculated by dividing the total number of purchases by the number of customers. This helps determine how regularly customers engage with your business.
- Customer Lifespan: This is the estimated duration a customer stays with your business. It’s often calculated by averaging the number of years (or months) customers continue to make purchases.
(Average Purchase Value x Purchase Frequency) x Average Customer Lifespan = Customer Lifetime Value
For example, if the average purchase value is $300, the purchase frequency is five times a year and the customer lifespan is two years, the CLV would be $3000.
($300 x 5) x 2 = $1,500 = $3000
CLV is a valuable tool for businesses keen on boosting revenue, reducing customer acquisition costs and supporting retention efforts. However, since the average small- to medium-sized business has thousands, if not millions, of customers each year, calculating lifetime customer value individually is extremely time-consuming and resource-intensive.
A more efficient and equally effective strategy is customer segmentation.