What is the CLTV (customer lifetime value) formula?
In ecommerce, the CLTV formula calculates the average lifetime value of a customer, or the typical amount a customer spends with a business throughout the customer’s lifetime. Along with customer acquisition costs, average order value, customer retention rate, and customer churn rate, customer lifetime value is a crucial business metric for assessing the health of a business.
There are a variety of formulas that can be used to calculate customer lifetime value. It can be calculated using data from past customers (as in historical customer lifetime value) or data from new and current customers (as in predictive customer lifetime value). Examples of CLTV formulas include:
- Annual revenue per user / customer churn
- Average order value x purchase frequency x average customer lifespan
- Average purchase value x average number of purchases
Measuring CLTV over time
Regardless of the formula you choose to calculate this metric for your business, it’s important to measure customer lifetime value over time, identifying any trends in customer behavior. From there, you can hone your retention strategies to better meet the needs of your existing customer base, encouraging those individuals to stay with your brand longer and increasing your amount of loyal customers.
Best practices for strengthening customer loyalty
Subscription brands can strengthen their customer loyalty by creating flexible shopping experiences. Making it easy to reschedule a delivery, swap items in an order, add one-time purchases to a subscription, or even cancel an order entirely can have a positive impact on the customer experience and encourage customers to stay with that business. Customer loyalty programs, which reward customers with perks like free shipping, discounts, and exclusive access to products, can also be a useful strategy for increasing retention and customer lifetime value.