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Definition of Customer Lifetime Value
This is a calculation of the total value of a customer over their entire journey with a brand. This can be calculated by looking at the total amount a customer has paid, subtracting the gross margin, and dividing by the churn rate (or cancellation rate) for that customer.
Formula:
Customer Lifetime Value (CLV) =
(Purchase Frequency [PF] × Average Order Value [AOV] × Gross Margin [GM] × Customer Lifespan [CL]) /
Number of New Customers
Note: This was adapted from the Omniconvert blog
Terms:
- Purchase Frequency (PF): This is how often the average customer makes a purchase from you. Choose a measurement for frequency that makes sense for your business. For instance, a car manufacturer and a quick service restaurant are going to have different time frequencies that make sense. The former might be in years and the latter in weeks.
- Average Order Value (AOV): This is the average amount a customer spends with your brand.
- Gross Margin (GM): This helps you calculate the amount of profit you make on each order, and gets to a much more accurate number than simply using the Average Order Value (AOV) as your measurement of how much you make from the average customer.
- Customer Lifespan (CL): Again, make sure to make this in the same unit of measurement of your purchase frequency (weeks, months, years).
- Number of New Customers: This is the number of new customers you gain within the same unit of frequency chosen for purchase frequency and customer lifespan.
Related
- Average Order Value (AOV)
- Key Performance Indicators (KPIs)
- Customer Acquisition Cost (CAC)
- Cost Per Lead (CPL)
- Customer Lifetime Value Model (North Star Goals)
- Recency, Frequency, and Monetary (RFM)
- Return on Ad Spend (ROAS)
Platforms
Resources related to Customer Lifetime Value
- Book: House of the Customer (2023) by Greg Kihlström
- Customer Lifetime Value Model is mentioned as one of the four “North Star Goals” all brands should be striving to achieve.
- Article: Reuters: “Lifetime value” is Silicon Valley’s next buzzword (December 2022)
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