What is customer lifetime value (CLV)?
Customer Lifetime Value is a predictive marketing metric that tells the estimated average net profit received from a single customer during his relationship with the brand.
The simple formula of CLV considers the period your customers keep buying from you, the number of purchases within a year, and the average order value. By multiplying all three parameters you will get the amount of money you will get with one customer.
How to calculate CLV
Simple CLV calculation for ecommerce stores (retail):
Average order value = $90
Average number of purchases by one customer a year = 8.5
Average relationship period in years = 3
This is the amount of money you can get from one customer on average. Further, you can multiply this feature with the number of customers you have yearly and predict your future profit. For example, if you had 10,000 unique customers in 2020, you can expect to get $22,950,000 within 2020, 2021, and 2022.
Before calculating CLV
To get the average order value take the revenue you received in one year and divide it by the number of all orders completed within this year. If you made $50,000 in 2020 with 5,000 orders complete, your average order value will be $10.
To get the average number of purchases by one customer, you’ll need to divide the number of orders by the number of customers. Say, in 2020 you had 2,000 orders completed by 100 unique customers, which will tell you that these customers purchased from you 20 times a year on average. Some of them may have done that more frequently than others, that’s why we level them to an average number.
To get the average relationship period (or the Life Time, actually) you’ll have to explore your customers and find out when they stop actively communicating with your brand and purchase. This feature will vary depending on the niche, but usually, it’s 6 months, 18 months, 3 years, 5 years.