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How to Simply Calculate Customer lifetime value..

Quick, what's the average lifetime value of your customers? If you're like a lot of companies, this isn't an answer that you necessarily have on hand. Customer lifetime value (LTV) can be defined as the monetary amount a customer may bring to you throughout the relationship with your brand. While there are many (complex) ways to calculate this, the following equation is the simplest way to get an indication of LTV: (avg. value of sale) x (avg. number of repeat purchases) x (avg. retention time).

Average value of sale is the monetary average of an individual sale. This is determined by calculating the total sales revenue for the year and dividing it by the number of sales for the year. ie. 25,000 sales for a total of R5,000,000 = R200 per sale

Average number of repeat purchases is the average number of times a customer is likely to purchase from you. To calculate this you would need to take the total number of sales for the year and divide it by the total number of unique customers for the year. ie 25,000 sales from 10,000 customers = 2.5 purchases per customer

Bridging the Gap: Understanding the Customer Disconnect

Average retention time can be defined as the number of years a customer shops with you. There are 2 simple steps you would need to follow to calculate this:

  • You first need to calculate your churn rate. Your churn rate is simply the drop off percent of customers from one year to the next (the percent that you keep is your retention rate). ie if you had 15,000 customers in 2015 and 10,000 customers in 2016 your retention rate would 67%, thus a churn rate of 33%.
  • Once you have calculated your churn and retention rate, you are then able to calculate your average retention time using this formula: retention time= 1/churn rate. ie 1/33% = 3 years

Using the formula above you are now able to determine that LTV= R200 x 2.5 x 3 years therefore LTV= R1500.

So why is this valuable? Well now that you know how much cash your customers should bring you, you can now craft highly targeted CRM strategies. The best way to do this is to create value segments based on the current spend of your customers and create a strategy for each segment. You'll also be able to optimize your marketing spend accordingly as you'll have a solid understanding of what your target CPA and ROI should be.

Essentially, if you're making decisions in the absence of understanding your customer's lifetime value, there's a good chance you'll find yourself revising your budgets and targets on a daily basis.

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