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WHAT IS CUSTOMER LTV LIFETIME VALUE? AND HOW TO CALCULATE IT?
The meaning and definition of customer lifetime value (CLTV). How to calculate customer lifetime value (CLTV) in marketing.
Brought to you by Mau, a Senior Digital Marketing Specialist at eDigital
WHAT IS CUSTOMER LTV LIFETIME VALUE? AND HOW TO CALCULATE IT?
CUSTOMER LIFETIME VALUE – DEFINITION
In marketing, customer lifetime value (CLV) is a forecast of the net profit gained from the whole relationship with a customer.
Marketers are interested in calculating CLV as it gives them a better idea of the real value of a new customer.
IMPORTANCE OF CUSTOMER LIFETIME VALUE
Customer lifetime value is important because it allows you to maximize the value of every customer relationship. This means that you’re providing a better customer experience that keeps people around for longer, which can also help improve the quality of your products and services.
HOW TO CALCULATE CUSTOMER LIFETIME VALUE
There are many ways to calculate Marketing CLTV, but a model that is tailored to the specifics of your sales cycle will be most effective.
CLTV is important because it helps marketers calculate their Marketing ROI over time.
Here is the formula to calculate CLTV:
CLTV = (Average Margin per Order x Repeat Sales Frequency x Average Retention Time)
Example: $300 = ($100 x 0.5 purchases per month x 6 months) Lifetime value is $300.
Here is the formula to calculate ROI:
ROI = (LTV-CPA)
Example: Use these values: LTV = $300 (calculated above) CPA = $50 (what we pay to “buy” high-quality customers) ROI = ($300-$50) Overall ROI is $250, a 400% increase on the CPA.
Knowing which customers have higher CLTVs allows you to better target leads who are like them, meaning marketers optimise efforts on the people who will maximise ROI and feel comfortable with your cost per acquisition. Knowing CLTV allows you to tailor the experience to meet the likes and interests of your best customers, increasing retention and referral rates.
Conclusion
As a whole, your CLTV data can and should inform your entire CRM strategy.
This one stat can be the impetus behind improving customer relationships throughout the customer lifecycle and accelerating your growth.
By gaining a deep understanding of the CLTV of your average customer and using that to determine how much to spend to get them to convert, you can get a more accurate sense of what your Marketing ROI is.
Customer Lifetime Value is an important marketing metric that helps predict the total revenue a customer is likely to generate over their entire relationship with the business.
Customer Lifetime Value is important for sales budgeting, forecasting, and long-term planning, influences marketing strategic decisions, drives profitability, guides customer-centric initiatives, and plays a pivotal role in sustaining and growing a successful business.
Final note: Are you struggling with rising customer acquisition costs and dependency on paid media?
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WHAT IS CUSTOMER LTV LIFETIME VALUE? AND HOW TO CALCULATE IT?
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