Calculating CLTV Doesn’t Have to Be Tricky
Attracting and retaining the highest value customers are the keys to success for every business. Knowing your customer’s value can help you make sound marketing decisions. One metric to assess customer value is Lifetime Value. The most basic CLTV formula is average annual gross revenue per customer times average customer relationship time, e.g., $250/year x 3 years = $750 CLTV. After the initial calculation, calculate your marketing cost per acquisition (CPA), e.g., $20,000 in acquisition media drove 200 new customers = $100 CPA.
Simply put, you spend $100 to acquire each new customer, who will then spend $750 with your business, for a gross profit per customer in their lifetime with your business of $650. In order to be profitable, CLTV must be greater than CPA. Some companies with lower margins will benefit by using net revenue instead of gross revenue in the CLTV calculation, deducting the cost of goods or services sold.
Looking at net revenue is also valuable if you are calculating CLTV by customer segment. You would do this in order to identify and profile the highest value segments in order to find “look-alike” customers for acquisition marketing efforts. You can also change the time period to months or a single year, to manage for a shorter cash flow cycle.
We emphasize allocating and analyzing marketing dollars spent on retaining the customers you already have, because acquiring a new customer on average costs five to 10 times more than retaining an existing customer.
Read the full article about basic and more complex CLTV formulas at CMSWire.