Customer Lifetime Value (CLTV or CLV) is the total worth of a customer to a business over the entirety of their relationship. It measures each customer's financial value, considering their purchases, loyalty, and potential referrals (promote them to your advocate!)). It's a crucial metric that helps businesses understand their customer base's long-term profitability and sustainability. This is the prediction of the net profit attributed to a customer's future relationship.
By knowing a customer's long-term value, businesses can prioritize efforts to acquire and retain high-value customers. CLTV helps companies allocate resources effectively, focus on building customer relationships, and optimize marketing efforts for long-term profitability. It also helps companies identify loyal customers who are generating substantial revenue, encouraging strategies to maintain those relationships.
CLTV calculation can vary, but a basic formula is: CLTV = (Average Purchase Value) x (Average Purchase Frequency) x (Average Customer Lifespan). Other formulas, including customer retention and gross profit margin, can be more complex. Don't know what it is? Well, it's good that we have our dictionary here :)
Key factors include the frequency of purchases, the average order value, the length of the customer relationship, the customer churn rate, and overall customer satisfaction and loyalty.
Businesses can improve their CLTV by enhancing customer experience, implementing customer loyalty programs, providing personalized customer service, engaging with customers regularly, and offering promotions or discounts to incentivize repeat purchases. These methods increase retention and promote loyalty.
Back to glossary