Average customer acquisition costs are between $127 and $462, depending on your industry. If you calculate your LTV and see that the ratio is low, you can put more effort into retaining current customers instead of looking for new ones.
How to Calculate Customer Lifetime Value
So, how do you calculate LTV? There are russia contact number whatsapp multiple ways to solve this task. The main difference between the formulas is accuracy. The more multipliers, the more accurate the result. Let's look at the two ways to determine LTV in this article.
Basic way
First, let's break down the basic customer lifetime value formula. This LTV formula allows you to quickly and easily calculate the figure you are looking for. In order to do that, you first need to know Customer Value and Average Customer Lifespan. How do you do it? Well, we have some useful formulas for that, too.
First, let's start with Customer Value. In order to calculate it, you need to know your Average Purchase Value and Average Purchase Frequency Rate.
Average Purchase Value
Average Purchase Frequency Rate
Then all you have to do is multiply one by the other and you get the Customer Value.
Customer Value
To find out the Average Customer Lifespan you need to average the number of years a customer continues purchasing from your business. The formula for this figure is as follows:
Average Customer Lifespan
Another way to estimate customer lifespan is to divide 1 by your churn rate percentage. Once you have all four of the indicators you are looking for, just use the following formula:
Customer Lifetime Value
Alternative way
Now let’s move to a more complex way of LTV calculation. The following method of calculating LTV is considered one of the most optimal. It is used in unit economics.
LTV = GML* (R / (1+D-R))
Where:
GML - the average profit of the client for the whole time of cooperation with the company. It can be calculated as the product of the profit coefficient (AGM) by the average check (AOV).
R - the retention rate. Calculated as the ratio of the difference between the total number of clients at the end of the period and the number of new clients for the period to the number of clients at the beginning of the period.
D - average discount provided by the company.
CLV: Calculation Examples
There are several formulas and models for the calculation, we will give two of them: a simple one and a detailed one. The first is suitable for analyzing past results, the second helps to predict LTV in business.
The basic formula
So now let's move to a specific customer lifetime value example and try to calculate the result. Let's say you had 70 customers who made a total of 120 purchases for a total of $150,000. In this way we can reveal that yours:
Average Purchase Value
Average Purchase Frequency Rate
So
Customer Value
Next, let's calculate the Average Customer Lifespan. Let's say your cu russia contact number whatsapp stomer is actively buying from your company for an average of 2 years.
Given two values, we can determine that:
Customer Lifetime Value
Expanded CLV formula
Consider more indicators, and therefore LTV will be more exact.
Why don’t we calculate the LTV of a business for the quarter with an example? Let's start with the average profit and assume the company's profit margin (AGM) is 40%, which is 0.4, and the average check (AOV) is $6,000. Then:
Now we will calculate the retention rate. At the beginning of the quarter the business had 40 clients, and at the end ‒ 75. 5 customers left, but 35 new ones appeared. So:
On the repeated order the client receives a discount of 5% (i.e. 0.05). Consider this in the final calculation:
It turns out that over the quarter the business receives an average of $48,000 per customer. While planning the marketing and other costs, you need to keep in mind this figure.
Calculating the formulas gives you average values. That is why if you calculate LTV for too big and diverse of an audience you might receive incorrect data. So it is better to determine LTV not for the whole client base, but for different client segments separately.
The main metric to compare with LTV is CAC (customer acquisition cost): how much a company spends to acquire new clients. To calculate CAC, divide the total marketing spend for the period by the number of new customers.