In this article we are going to analyze the meaning of Customer Lifetime Value, what it is used for, and how to use it within your company.
What is Customer Lifetime Value?
Customer Lifetime Value (CLTV) is a business metric that measures the value a customer will bring throughout their entire business relationship with your business. Its direct translation into namibia phone number resource Spanish would be something like Customer Lifetime Value .
How Customer Lifetime Value is measured
A simple and direct way to measure Customer Lifetime Value is to take the annual revenue of a customer, subtract the acquisition costs , and multiply by the average number of years your customers live.
Sounds complicated? Don’t worry, we’ll go into much more detail at the end of the article. Calculating CLTV has several nuances that depend on the type of business you have or how stable your customer base is, so we’ll discuss each specific situation in a later section.
For now, you can test it with one of your clients and apply the following formula:
Annual Income x Average Life Years - Acquisition Cost
Let's see it with an example:
You have a client who has generated €280 for you per year
The client has been with you for 2 years
To get the client, you have spent €300 on advertising
In this situation, the Customer Lifetime Value of this customer would be:
280€ x 2 - 300 = 260€
What does this mean? Basically, this customer has generated around €260 for your business, taking into account what it costs you to obtain it.
Keep in mind that the revenue generated must include the expenses to serve the client-- support, materials, etc... this is part of client budgeting , which is another metric that you must be clear about to know if your ongoing relationship with a client is profitable.
This simple way of calculating CLTV does not take into account elements such as the time value of money, but the idea is to keep things simple. We will go into more detail about this further down in the same article.
