How to Calculate & Use Customer Lifetime Value Models for Better Products
Customer Lifetime Value (CLTV) is a prediction of how much a customer is worth over the course of their entire future relationship with your brand, product, or service.
For example, if customer “A” makes a one-time purchase of $200, they would have a higher CLTV than customer “B” who makes a one-time purchase of $50. However, if customer “B” made monthly purchases at the same rate for 5 or more months, they would have a higher lifetime value (of $250+) than customer “A”.
Calculating your customer lifetime value model is an important step for any business. Knowing what your average customer is worth over their “customer lifetime” informs your marketing and retention spending.
How to Calculate Customer Lifetime Value
Calculating your CLTV is a simple 5 step process.
Calculate Average Purchase Value: The product’s average revenue over one year, divided by the number of purchases.
Average Purchase Frequency: Total number of purchases divided by the total number of unique customers over a one year period.
Customer Value: Multiply Step 1 by Step 2 (average purchase value X purchase frequency)
Average Customer Lifespan: The average number of years a customer continues to purchase from you.
CLTV: Multiply customer value by customer lifespan (Step 3 X Step 4)
How to Use CLTV to Develop More Successful Products
Creating a customer lifetime value model informs your spending on customer acquisition and retention. The CLTV helps to establish your value per lead so you can determine how much you should spend to acquire new customers.
You can also use it to determine where to prioritize your focus in the marketing funnels. Typically, your most profitable customer is one you have already acquired who is still early to midway through their customer lifespan. These are your regulars - the marketing costs associated with them are low and the conversion rates are high. It’s where you get the most bang for your buck.
Of course, you don’t want to ignore new or late-phase customers, but they may not be the bulk of your marketing budget. A common approach is 20% of efforts should be devoted to acquiring new customers, 60% to current repeat customers, and 20% to retaining those nearing the end of their cycle. Still, it’s important to consider your KPIs when choosing how to allocate this spend.
Another key value in CLTV models is improving on the pain points in customer satisfaction & retention.
Understanding your CLTV creates a good snapshot of your revenue, giving you insights into your consumers. You can use these insights to help keep them around longer. The longer the customer lifespan, the greater their lifetime value, so it’s worth keeping them around a little longer with product improvements.
Some common pain points you can uncover and resolve include:
Improving service quality or functionality
Implementing loyalty programs
Maximize Your CLTV With Strategic Technology Partners
Torinit is a strategic technology partner whose primary focus is to help you grow. Our services range from product development to technical audits, and strategic implementations to increase your return from customers and decrease internal costs and processes.
Contact Torinit today and improve your CLTV.