

{"id":69066,"date":"2019-03-29T05:32:42","date_gmt":"2019-03-29T12:32:42","guid":{"rendered":"https:\/\/www.questionpro.com\/blog\/?p=69066"},"modified":"2023-08-10T07:03:29","modified_gmt":"2023-08-10T07:03:29","slug":"customer-lifetime-value-clv-calculation","status":"publish","type":"post","link":"https:\/\/www.questionpro.com\/blog\/customer-lifetime-value-clv-calculation\/","title":{"rendered":"Customer Lifetime Value Calculation &#038; Formula"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">Knowing how to calculate <\/span><a href=\"https:\/\/www.questionpro.com\/blog\/customer-lifetime-value-clv\/\"><span style=\"font-weight: 400;\">customer lifetime value<\/span><span style=\"font-weight: 400;\"> (CLV)<\/span><\/a><span style=\"font-weight: 400;\"> is crucial to a business\u2019 marketing success. The CLV defines the present value of a brand\u2019s or organization\u2019s customer based on past or predicted purchases. Once the CLV is calculated, businesses can see a defined metric prediction of the value that a customer\u2019s association will have on their future relationship; It can also help businesses determine their high-value customers and aid in guiding their marketing spend.<\/span><\/p>\n<h2><b>What is customer lifetime value,<\/b><b> and how does it affect profit?<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">CLV is a fundamental part of customer relationship management (CRM) strategy, as it emphasizes the focus of the <\/span><a href=\"https:\/\/www.questionpro.com\/blog\/customer-journey-mapping-customer-experience\/\"><span style=\"font-weight: 400;\">customer journey<\/span><\/a><span style=\"font-weight: 400;\"> on the importance of long-term customer relationships.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">As business owners know, the cost of acquiring new customers outweighs the cost of retaining existing customers. So, knowing the best ways to retain existing customers is essential for increasing profitability.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Two marketing analytics metrics directly affected by <\/span><span style=\"font-weight: 400;\">customer lifetime value <\/span><span style=\"font-weight: 400;\">are marketing mix modeling and marketing return on investment (ROI). Marketing mix modeling takes statistics and analyzes the impact that sets of marketing tactics have on sales. Marketing ROI helps businesses determine if their spend is being used efficiently. Knowing that CLV affects these areas (as well as <\/span><a href=\"https:\/\/www.questionpro.com\/customer-satisfaction.html\"><span style=\"font-weight: 400;\">customer satisfaction level (CSAT)<\/span><\/a><span style=\"font-weight: 400;\"> and <\/span><a href=\"https:\/\/www.questionpro.com\/blog\/customer-effort-score\/\"><span style=\"font-weight: 400;\">customer effort score (CES)<\/span><\/a><span style=\"font-weight: 400;\">) is vital for allocating resources, providing <a href=\"https:\/\/www.questionpro.com\/blog\/gap-analysis\/\">gap analysis<\/a>, and understanding the behavior of existing and prospective customers.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The <\/span><span style=\"font-weight: 400;\">customer lifetime value<\/span><span style=\"font-weight: 400;\"> model itself relies on a few different factors within predictive analytics techniques, with varying levels of sophistication and accuracy.<\/span><\/p>\n<p style=\"text-align: center;\"><span style=\"font-weight: 400;\">Learn more: <\/span><a href=\"https:\/\/www.questionpro.com\/survey-templates\/customer-satisfaction-surveys\/\"><span style=\"font-weight: 400;\">Customer Satisfaction Survey Questionnaires + Templates<\/span><\/a><\/p>\n<h2><b>How to calculate customer lifetime value<\/b><b>: methods and steps<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">The best method from the list below will depend on which metrics a business uses to track success and how they track their data.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Some of the most widely used methods of calculating <\/span><span style=\"font-weight: 400;\">customer lifetime value<\/span><span style=\"font-weight: 400;\"> are based on historic CLV, predictive CLV, lifespan CLV, cohort analysis, and individual CLV.<\/span><\/p>\n<h3><b>Historic CLV: <\/b><b>customer lifetime value calculation<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Historic CLV measures the value of transactions or the sum of gross profit from all past purchases made by an individual customer. This calculation requires access to existing customer data involving purchases from a specific time period.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">To calculate the historic customer lifetime value, you can use the following formula: <\/span><\/p>\n<p><b>Customer Lifetime Value (Historic)= (Transaction 1+ Transaction 2 + Transaction 3\u2026.+ Transaction N) * AGM<\/b><\/p>\n<p><i><span style=\"font-weight: 400;\">Where <\/span><\/i><b><i>N<\/i><\/b><i><span style=\"font-weight: 400;\"> is the last transaction made by the customer at your store.<\/span><\/i><\/p>\n<p><span style=\"font-weight: 400;\">Calculating the CLV prediction in this manner (based on net profit) gives businesses the actual profit that a customer contributes to the business. The historic <\/span><span style=\"font-weight: 400;\">customer lifetime value<\/span><span style=\"font-weight: 400;\"> accounts for customer service cost, cost of returns, acquisition cost, marketing cost, etc.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The downside to calculating historic CLV is that determining the value on an individual basis can get incredibly complex, so it is better to consider groups of customers or to create a system to manage data.<\/span><\/p>\n<h3><b>Predictive <\/b><b>customer lifetime value formula<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">The predictive CLV is a great indicator of the total value a customer will eventually give a business over their whole lifetime, as it uses more collected data.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In practice, determining the exact predictive CLV can be difficult when considering fluctuations in price, discounts, etc. For this reason, there are a couple of ways to calculate predictive CLV that vary in complexity and precision.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">To calculate with the predictive CLV model, businesses must use transaction history and behavioral patterns to forecast how a customer\u2019s value will evolve over time.<\/span><\/p>\n<p style=\"text-align: center;\"><em><strong>LEARN ABOUT:<\/strong> <a href=\"https:\/\/www.questionpro.com\/blog\/behavioral-targeting\/\">Behavioral Targeting<\/a><\/em><\/p>\n<p><span style=\"font-weight: 400;\">Simple predictive CLV can be calculated using the formula:<\/span><\/p>\n<p><b>Customer lifetime value= ((Average monthly transactions * Average order value) Average gross margin) * Average customer lifespan<\/b><\/p>\n<p><span style=\"font-weight: 400;\">This equation becomes gross margin contribution per customer lifespan (GML). Therefore,<\/span><\/p>\n<p style=\"text-align: center;\"><b>Customer lifetime value= Gross margin contribution * (Monthly <a href=\"https:\/\/www.questionpro.com\/blog\/retention-rate\/\">retention rate<\/a>\/(1+Monthly discount rate-Monthly retention rate))\u00a0 <\/b><span style=\"font-weight: 400;\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 <\/span><\/p>\n<p style=\"text-align: center;\"><span style=\"font-weight: 400;\">Learn more: <\/span><a href=\"https:\/\/www.questionpro.com\/features\/net-promoter-score.html\"><span style=\"font-weight: 400;\">Net Promoter Score (NPS) calculation<\/span><\/a><\/p>\n<h3><b>Lifespan <\/b><b>customer value calculation steps<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Another widely used method to calculate the CLV is the lifespan customer value calculation. This method requires you to have the customer value and multiply that by the customer lifespan. This CLV calculation method consists of five steps. They are:<\/span><\/p>\n<ol>\n<li style=\"font-weight: 400;\"><b>Calculate the average purchase value: <span style=\"font-weight: 400;\">This number can be derived by dividing the revenue of the organization by the total number of purchases in the year. This timespan should be of a fixed time, like one year or two years.<\/span><\/b><\/li>\n<li style=\"font-weight: 400;\"><b>Calculate the average frequency purchase rate:<\/b><span style=\"font-weight: 400;\"> This number can be derived by dividing the number of purchases by the unique customers that made a purchase over that time period.<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Calculate the customer value: <span style=\"font-weight: 400;\">The average customer value can be derived by multiplying the average purchase value and the average frequency purchase rate.<\/span><\/b><\/li>\n<li style=\"font-weight: 400;\"><b>Calculate the average customer lifespan: <span style=\"font-weight: 400;\">The <\/span><a href=\"https:\/\/www.questionpro.com\/blog\/customer-lifetime-value-clv\/\"><span style=\"font-weight: 400;\">customer lifespan<\/span><\/a><span style=\"font-weight: 400;\"> can be derived by averaging the number of years a customer buys from a business.<\/span><\/b><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The last step would be to multiply the customer value and the average customer lifespan together. This can help calculate how much revenue a customer can contribute in their life cycle with you.<\/span><\/li>\n<\/ol>\n<p style=\"text-align: center;\"><em><strong>LEARN ABOUT:<\/strong> <a href=\"https:\/\/www.questionpro.com\/blog\/customer-lifecycle\/\">Customer Lifecycle<\/a><\/em><\/p>\n<p><span style=\"font-weight: 400;\">The lifespan customer value calculation is similar to the predictive <\/span><span style=\"font-weight: 400;\">customer lifetime value calculation<\/span><span style=\"font-weight: 400;\"> in that they are both popular predictive models. Although extensive, the lifetime CLV shouldn\u2019t be considered a conclusive <\/span><a href=\"https:\/\/www.questionpro.com\/blog\/what-is-research\/\"><span style=\"font-weight: 400;\">research method<\/span><\/a><span style=\"font-weight: 400;\">.<\/span><\/p>\n<h3><b>Cohort Analysis<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">The cohort analysis method collects current customers with similar characteristics and groups them together. Cohort analysis can help organizations draw conclusions between groups of people. To keep cohort analysis conclusive, organizations must be aware of any changes in market dynamics.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">There are a few things to keep in mind when calculating cohort analysis, including determining what should be measured (subscription start\/cancel dates), the specific cohorts that are relevant and how far they should be segmented (measuring start dates and the differences between each subscription plan types), and which method should be used to perform the analysis (excel or another platform).<\/span><\/p>\n<h3><b>Individualized CLV<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Organizations may find the individualized CLV useful for considering a broader perspective. This value primarily helps to manage ROI by evaluating distribution methods, marketing methods, landing pages, campaigns, etc. One way that this CLV calculation can be used is to compare the spend of social media marketing to the spend of digital marketing.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">These CLV calculation methods are used by a variety of businesses and organizations, depending on their <\/span><a href=\"https:\/\/www.questionpro.com\/blog\/data-collection\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">data collection methods<\/span><\/a><span style=\"font-weight: 400;\"> and reporting objectives.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The above methods for calculating CLV give businesses insight into which of their channels are the most efficient, who they should be targeting, where their marketing strategy falls flat, and how they can direct their customer service resources to propel their profits and get a better understanding of their customer base.<\/span><\/p>\n<p style=\"text-align: center;\"><em><strong>LEARN ABOUT:<\/strong> <a href=\"https:\/\/www.questionpro.com\/blog\/average-order-value\/\">Average Order Value<\/a><\/em><\/p>\n<p><span style=\"font-weight: 400;\">However, none of these insights can be possible without a solid data collection strategy. Thankfully, the team here at QuestionPro CX is here to help! Master the best ways to understand your customer base or collect your data in one dashboard. <\/span><a href=\"https:\/\/www.questionpro.com\/a\/showEntry.do?classID=1063&amp;sourceRef=home-cx\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">Sign up for a free trial<\/span><\/a><span style=\"font-weight: 400;\"> or <\/span><a href=\"https:\/\/info.questionpro.com\/meetings\/kenneth-peterson\"><span style=\"font-weight: 400;\">book a demo<\/span><\/a><span style=\"font-weight: 400;\">.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Knowing how to calculate customer lifetime value (CLV) is crucial to a business\u2019 marketing success. The CLV defines the present [&hellip;]<\/p>\n","protected":false},"author":86,"featured_media":69067,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[203],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.4 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Customer Lifetime Value Calculation &amp; Formula | QuestionPro<\/title>\n<meta name=\"description\" content=\"The customer lifetime value calculation (CLV) provides valuable insights to both existing and prospective customers. 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