What is Customer Lifetime Value (CLTV) and how can you benefit from it?
Customer Lifetime Value (CLTV) is the metric you need to measure the value of customers over the entire duration of their relationship with your organisation.
What is Customer Lifetime Value (CLTV)?
Customer lifetime value is a metric used to measure the total revenue from a customer over their entire relationship with an organisation. Some tools will typically measure customer value through their initial acquisition value, CLTV allows you to see the customers value over the entirety of their relationship with you. CLTV is not to be mistaken for Recency, Frequency and Monetary Value (RFM) which refers to the metric that measures the current relationship a customer has with your business.
How to calculate CLTV?
You can determine the CLTV in a simplistic way by taking the average order total, multiplying it by the average number of purchases in a year, then multiplying that number by average customer retention time in years.
Order Total X Average no of purchases/yr X Av customer Retention Yrs = £CLTV
Of course, as marketers we know that applying one value across an entire data set is not that simple. The behaviour of customers by segment, customer type, or by the brand through which you service that customer, is often completely different, and as such marketers can and should treat them differently.
How do order returns effect CLTV?
The nuances are even further complicated when customer returns are considered. How does this affect the customer lifetime value? Should the value of the return be deducted from the customer value? Should you add-in consideration for the cost to the business that is associated with a return? Should you apply values appropriate to each product’s profitability and cost to serve, as not all products are equal?
To sum up
Customer lifetime value (CLTV) is a metric used to measure customer value over the entire duration of their relationship with a business. It is a key metric that is used to support decision making and the measurement of marketing performance. If you knew the CLTV by brand, segment, or by product, would you:
- Optimise budget and campaigns accordingly?
- Apply different strategies to each segment?
- Confirm or refute a need for a retention strategy?