How to Calculate Customer Lifetime Value
To calculate customer lifetime value, which predicts the total revenue a business can reasonably expect from a single customer account, you need to calculate average purchase value, and then subtract average purchase frequency rate from that number to determine customer value. Then, once you calculate average customer lifespan, you can multiply that by customer value to determine customer lifetime value.
Customer lifetime value (LTV) is one of the most important metrics to measure at any growing company.
By measuring LTV in relation to cost of customer acquisition (CAC), companies can measure how long it takes to recoup the investment required to earn a new customer -- such as the cost of sales and marketing.
And the metric itself tells companies how much revenue they can expect one customer to generate over the course of the business relationship -- which is something customer support and success teams have direct influence over.
The longer a customer continues to purchase from a company, the greater their lifetime value becomes. And customer support reps and customer success managers, who play key roles solving problems and offering recommendations that make customers decide to stay loyal to a company -- or to churn.
Customer Lifetime Value Formula
- Calculate average purchase value: Calculate this number by dividing your company's total revenue in a time period (usually one year) by the number of purchases over the course of that same time period.
- Calculate the average purchase frequency rate: Calculate this number by dividing the number of purchases over the course of the time period by the number of unique customers who made purchases during that time period.
- Calculate customer value: Calculate this number by multiplying the average purchase value by 1, and subtracting the average purchase frequency rate from that number.
- Calculate average customer lifespan: Calculate this number by averaging out the number of years a customer continues purchasing from your company.
- Then, calculate LTV by multiplying customer value by the average customer lifespan. This will give you an estimate of how much revenue you can reasonably expect an average customer to generate for your company over the course of their relationship with you.