How to Calculate Lifetime Customer Value

February 24, 2017
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How to Calculate Lifetime Customer Value

The goal of every business is to acquire and retain customers and increase revenue. One way that companies do that is by collecting and analyzing data, generating reports, and then using the information to create strategies that will move them closer to their goal. One important metric to look to for strategizing is the lifetime customer value (LTV). The lifetime value of a customer is the total sum that a customer has and will spend on your products or services. Determining LTV can help you in multiple areas including marketing, acquisition, retention, and forecasting.

Why is Lifetime Customer Value Important?

The lifetime customer value metric is important because it allows you to maximize that value and drive business growth. It is used to support numerous business aspects, but two stand out:

1. Acquisition Strategy

Allows businesses to tailor spending to specific channels based on the LTV of customers that are acquired using those channels.

2. Customer Relationship Management

Allows business to grow customer loyalty by personalizing marketing, promotions and other communications the most valuable customers.

Lifetime Value Drives Growth By:

1. Generally, a minority of a company’s customers account for a majority of their profits. You need to know who those customers are.    

2. It can help you build accurate and detailed customer personas, which will allow you to better allocate marketing and advertising dollars to the customer segments with the highest value.    

3. The cost of acquiring new customers is typically higher than what is spent retaining existing customers. Knowing the LTV will help you retain valuable customers and develop an understanding of what amount you can afford to acquire new customers.    

4. It allows you to determine the ROI of marketing campaigns.    

5. It allows businesses to have a long-term approach to creating customer value, rather than focusing on short-term, promotional deals that only maximize profit on a particular item or shopping experience.    

6. It focuses on customer loyalty, which has been proven to be a significant indicator of successful businesses.    

7. It leads to bigger opportunities for value creation instead of smaller ones. For example, when LTV is higher, businesses are able to consider things like expanding into new markets, or offering new services, rather than being concerned about smaller issues like whether to discontinue a slow-moving inexpensive product.    

8. It allows more accurate forecasting for expected sales revenue, which is necessary for future planning, budgeting, and management strategies.

Calculating Lifetime Customer Value  

When you are calculating lifetime customer value, you can use real numbers or an estimation if you are in the planning stages or just starting out. The calculation is simple: multiply the average sale amount by the number of transactions by the time period.     Here’s an example of how it works: A customer pays $100 every month for a subscription service and has signed up for two years. The value of that customer will be:      

$100 X 12 months X 2 years = $2,400 in total revenue or $1200/year     

You can see that it’s a very simple calculation. However, depending on what type of business you have, and exactly what information you want included to increase accuracy, there are multiple variants to add to the calculation. One example is including margin in the equation. If you want to see the profit that you will earn over the life of your customer, then you multiply your LTV total by the margin amount.     

Sometimes you may want to drill down into specific demographics, channels, locations, or customer actions. There are several ways that you segment your customers to get an even more in-depth look at LTV. Are customers that are enrolled in your loyalty program generating more revenue than those who aren’t? Is one sales channel attracting higher value customers than others? Are customers in a particular area of the country worth more to your business? You can answer these questions and more when you calculate your LTV by segment.    

Glew Makes Determining Lifetime Customer Value Easy

While calculating LTV is a fairly simple task, it isn’t really an effective use of your time or money to sit down with a calculator and pencil in hand. You want to be able to see the data you need quickly so that your time can be focused on growing your business and increasing your bottom line. This can easily be accomplished when you use Glew’s Performance Reporting software solution. It can quickly provide you with all of the reports and segmentation you need including lifetime customer value and numerous other crucial metrics. It allows you to calculate quickly so you can analyze effectively.    

Want to see what Glew can do for you and your business? Try it free for 10 days.

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