What is Customer Lifetime Value? (And How to Calculate it)

Are you wondering how much money do you have to invest in acquiring new customers and retaining existing ones?

One of the most important metrics many businesses ignore or don’t measure is customer lifetime value (CLV). It helps you estimate how valuable a customer is for your website.

In this article, we’ll show you what is customer lifetime value and how to calculate it.

What is Customer Lifetime Value?

Customer lifetime value is the average amount of money a customer will spend on your business over a time period. In simple words, it tells you how much profit you can make from a single customer.

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For an eCommerce store selling footwear, customer lifetime value would be around $2,000. This may not seem a lot but the number of customers will be more.

On the other hand, if you’re selling ERP software, then the value could be more than $100,000. However, you’ll have only a few customers, mainly companies who can invest in an expensive product.

As you can see, CLV is a great indicator of how much money can you make from your buyers. It also tells you how many customers you need to attract to your business.

We’ll break down customer lifetime value definition into its formula a little later in the post. With that, why should you care about customer lifetime value? Let’s find out…

Why is Customer Lifetime Value Important?

When it comes to increasing the profitability of your business, the lifetime value of customers plays a huge role.

If you’re a business owner, here’s why you should calculate CLV:

  • Focus on Right Customer Segment – With the help of customer lifetime value, you can focus on customer retention with the segment of users that generate the most revenue
  • Estimate the Cost of Acquiring New Users – Getting new visitors is often costly, so it’s important to find out if how much will it cost to acquire them
  • Improve User Experience – By calculating CLV, you can find areas for improving user experience and maximizing value at different touchpoints
  • Create Lasting Relationships – Developing long-term relationships with customers is key to high profits and CLV can help you see how strong your brand loyalty is

Now, are you ready to see customer lifetime value calculations?

How to Calculate Customer Lifetime Value?

In its simplest form, the customer lifetime value formula is multiplying the average purchase value with the number of times a customer buys your products each year and the length of time the customer has a relationship with your brand.

customer lifetime value formula

Sounds like a mouthful, doesn’t it? Don’t worry, we’ll explain it with an example.

Let’s say you have an online footwear store and a customer spends $75 each year on 1 pair of sneakers for the next 10 years. So, the lifetime value of the customer would be $750 (75 x 1 x 10).

At the same time, another customer buys 1 pair of leather boots for $150 for 10 years as well. Their CLV will come out to be $1,500 (150 x 1 x 10).

If you compare the CLV for both segments of buyers, you’ll see that customers of leather boots are more profitable than sneakers.

While this is a straightforward way for customer lifetime value calculation, in many large organizations the computation becomes more complicated.

But with the right tools, you can easily figure out each of the components of the formula. We’ll show you how…

Average Purchase Value

To find out the average purchase value of your website, you can simply divide your total revenue with the total number of orders.

And if you don’t want to go through the manual process, you can use MonsterInsights. It lets you properly set up Google Analytics in WordPress and see detailed reports inside your dashboard.

Using its eCommerce addon, you can view the average order value of your WordPress website or online store. After installing the plugin, go to Insights » Reports and then select eCommerce from the top.

Now select the date range and view your average purchase/order value.

customer-lifetime-value

Number of Items Ordered

MonsterInsights can also help you uncover the total items ordered. Its eCommerce report gives you a list of Top Products along with quantity, percentage of sales, and total revenue.

You can use the report to see the total quantity of products ordered during a time period. Then use the figures to calculate customer lifetime value for each product category.

lifetime-value-of-customer

Average Lifespan of a Customer

Now estimating a lifespan of a customer can be a bit tricky. You can use industry benchmarks to calculate the lifespan of a customer to get started. Or if you’re in the business for a long time, you can use past data to come up with a figure.

However, a more simple way of finding out the lifespan is by using the churn rate. It is the rate in which a customer no longer does business with your company.

If you divide 1 by your churn rate, you can estimate the average lifespan of your customers. Once you have the figure, just plug everything in the formula and calculate CLV.

How to Boost Lifetime Value of a Customer?

After you’ve calculated how much profit a customer will generate for your website, here are a few ways of increasing customer lifetime value:

  • Increase Returning Visitors – If you can get people to come back to your site, you’ll have a 75% higher chance of making a purchase, which means an increase in CLV
  • Create Loyalty Programs – You can offer rewards to visitors to get them to buy your products and services again and turn them into loyal customers
  • Provide Superior Customer Support – It’s important that you resolve your customer’s queries in a timely manner and answer all their queries, so they have a great experience with your company
  • Stay in Contact with Your Customers – By keeping in contact with your customers, either through an email newsletter, social channels, or any other medium, you remind them that you haven’t forgotten about them and it helps you develop a relationship with your buyers
  • Offer Bundles and Upsell Products – You can boost your customer lifetime value by upselling products or offering bundles on products that compliment each other
  • Make the Buying Process Easy – Keep the buying process simple and with few steps because many visitors abandon carts due to complicated checkout methods or forms asking for a lot of information

And there you have it, folks!

You now know how valuable are your customers, which should you acquire more, and which segments to retain.

We hope you liked our article on what is customer lifetime value and how to calculate it. You can also go through our WooCommerce conversion tracking.

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