How To Calculate Customer Lifetime Value (2024)

Why is calculating customer lifetime value important?

Understanding the lifetime value of your customers is crucial for the success of your ecommerce business. It helps you make informed decisions about how much to invest in acquiring new customers, how to prioritize your marketing efforts, and how to maximize the value of your existing customer base.

How to calculate the lifetime value of a customer

1. Segment customers with RFM

RFM (Recency, Frequency, Monetary) analysis is a method of categorizing customers based on their purchasing behavior. By segmenting your customers according to these criteria, you can identify high-value customers and tailor your marketing efforts accordingly.

2. Determine average order value

Calculate the average amount of money each customer spends in a single transaction. This can be done by dividing the total revenue by the number of orders.

3. Figure out average purchase frequency

Calculate how often a customer makes a purchase within a given time period. This can be done by dividing the total number of orders by the number of unique customers.

4. Calculate customer value

Multiply the average order value by the average purchase frequency to determine the value of each customer over a specific time period.

5. Multiply customer value by average lifetime value

Estimate the average lifespan of a customer and multiply it by the customer value to get the customer lifetime value.

Putting your CLV to work

Minimize cost per acquisition

By knowing the lifetime value of a customer, you can set your customer acquisition cost to ensure that you are making a profit from each new customer you acquire.

Maximize return on investment

Use the CLV to determine how much you can afford to spend on marketing and advertising to maximize your return on investment.

Set budget for paid ad campaigns

Allocate your marketing budget based on the CLV of your customers, focusing on channels that bring in high-value customers.

Calculate maximum bid for campaigns

Knowing the CLV allows you to determine the maximum bid you can afford for paid ad campaigns, ensuring that you are not overspending to acquire new customers.

Identify upselling opportunities

Use CLV to identify opportunities to upsell to existing customers, increasing their lifetime value to your business.

Finding loyal customers for your business

Understanding the CLV of your customers can help you identify and reward loyal customers, encouraging them to continue doing business with you.

Calculating customer lifetime value FAQ

What is the customer lifetime value formula?

The CLV formula is: Customer Value x Average Customer Lifespan = Customer Lifetime Value

What are the five steps to calculate customer lifetime value?

  1. Segment customers with RFM
  2. Determine average order value
  3. Figure out average purchase frequency
  4. Calculate customer value
  5. Multiply customer value by average lifetime value

How do you calculate customer lifetime in years?

The customer lifetime can be calculated by analyzing the average lifespan of your customers based on their purchasing behavior and engagement with your brand.

How do you calculate customer lifetime value from discount rate?

The customer lifetime value can be adjusted based on the discount rate to account for the time value of money and the impact of future cash flows.

What is the difference between customer lifetime value and customer lifetime?

Customer lifetime value refers to the monetary value a customer brings to a business over their entire relationship, while customer lifetime refers to the duration of the relationship between a customer and a business.