Customer lifetime value formula

How to calculate lifetime value

Today we want to share with you information that will help you know how to calculate customer lifetime value, one of the most important elements in determining the marketing budget for an organization.

As mentioned above, knowing how to calculate customer lifetime value defines marketing expenditures and provides an analysis in order to understand the behavior of existing and potential customers.

Historical customer lifetime value takes into account the cost of customer service, the cost of returns, the cost of acquisition, the cost of marketing, and so on. However, the disadvantage is that it is extremely complex to calculate individually.

All of the methods for how to calculate customer lifetime value mentioned above are used by organizations depending on their data collection methods and reporting objectives.

Customer retention rate

What is interesting is that one of the four main strategies used to increase these rates is the creation of systems to calculate the customer lifetime value (CLTV).

Customer lifetime value is a forecast of the amount of money a company expects to receive from a user for as long as the user remains a customer.

In business, it is not enough to say that time is worth gold. It is necessary to quantify as precisely as possible the monetary value that a consumer represents to the company for as long as a business relationship exists.

For example, are you a Netflix user? Then your customer lifetime value is the projection that Netflix makes to try to predict how long you will remain a subscriber and how much money you will spend with the company from the moment you subscribe to the moment you stop subscribing.

Take Nespresso’s or Gillette’s business model as a reference: CLTV involves all the purchases of coffee capsules or blade refills that a customer is expected to make over time.

Calculate incremental sales

Customer lifetime value (CLV) is defined as the value a customer has to a brand or an organization because of the purchases they made in the past, in other words, it refers to the net benefit associated with a customer throughout their lifecycle. Basically, it is the value a company will derive from its customers during their relationship.

Market research relies heavily on data. In this age of technology, most market researchers prefer to track everything, be it emails, social media, website visits and payments made. There are a few tools that can help measure the entire customer journey from start to finish and serve to estimate the value of every touch point the customer has with a company.

Customer lifetime value is an important metric, the fact that companies know what their total spend is in the market and their true profit per customer helps them make important decisions about various departments such as sales, marketing, product development and customer service and support. For example:

How to calculate ltv

Calculating LTV, or Lifetime Value of a Customer, helps predict the revenue a company can anticipate from a single customer or account and measure the return on investment of marketing efforts.

It has been proven that it is much more expensive to acquire a new customer than to retain an existing one, so to boost the profitability of your business, the key is to extend the life of the customer, or the length of time they will continue to buy from you, with the help of a retention strategy.

Also called Customer Time-Through-Value, LTV is considered one of the most important metrics for determining marketing ROI. The other is the Cost of Customer Acquisition, or CPA.

Hence the importance of building customer loyalty and extending their relationship with the company as much as possible, since the longer and more purchases are made, the cheaper it will be to acquire and retain them, and the more profitable it will be for the business.

What is done through established formulas is to update to present value the cash flow expected from an investment project, in this case customer retention, discounting the cost of capital in the future.

Eduardo José Cazorla