Because it is a crystal ball that tells you how much moolah a customer will drop in your coffers during their lifespan.

Or in some other (boring) words:

Customer Lifetime Value

(sometimes referred to as CLTV, CLV or simply LTV),

is a prediction of the total net profit that a company can make from a customer throughout the course of their relationship.

It is a critical metric in marketing and customer relationship management, as it helps businesses understand how much revenue they can expect a customer to generate over time.

Basically, It’s like trying to predict if your blind date will turn into a life-long romance! But remember, just like dating, when calculating CLTV, there are some foot-in-mouth moments to avoid:

👉 Remember the wallet:
You need to spend some to get some. If you’re spending a fortune to woo customers and they’re not spending as much back, that’s a one-sided relationship. Balance your acquisition costs with the expected CLTV.

👉 Not all customers are created equal:
Applying the same CLTV to every customer is like assuming everyone loves pineapple on pizza. It’s not true (I know, shocking!). So, segment your customers, and calculate CLTV accordingly.

👉 Love the one you’re with:
Focus on keeping your current customers happy, not just chasing new ones. Remember, a bird in hand (or a customer in your database) is worth two in the bush!

👉 Count the pennies:
Calculate CLTV based on net profit, not revenue. Let’s not forget Uncle Sam and overheads want their share too.

👉 Update regularly:
CLTV isn’t a high school yearbook photo, it should change and improve over time.

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You: WAIT, this sounds like something I want to do! But how the #¤% do I find my CLTV??

Me: Hold my beer..

—

Calculating CLTV involves several steps and can be relatively simple or very complex, depending on the level of detail a company wants to get into.

Here’s a simplified approach:

👉 Average Purchase Value:
Calculate this by dividing the total revenue over a given period by the number of purchases during that same period.

👉 Average Purchase Frequency:
This is calculated by dividing the total number of purchases by the number of unique customers who made purchases during that period.

👉 Customer Value:
Multiply the Average Purchase Value by the Average Purchase Frequency to calculate the customer value.

👉 Average Customer Lifespan:
This is generally calculated by averaging the number of years a customer continues purchasing from your company.

👉 Customer Lifetime Value:
Finally, multiply the Customer Value by the Average Customer Lifespan. This gives you the CLTV.

So there you go, CLTV (or CLV or LTV) in a nutshell

– a tool to keep your business boogieing, your customers swooning, and your accountants smiling.