Customer lifetime value (CLV)

Customer lifetime value (CLV) is one of the key stats likely to be tracked as part of a customer
experience program. CLV is a measurement of how valuable a customer is to your company with an
unlimited time span as opposed to just the first purchase. This metric helps you understand a reasonable
cost per acquisition.

CLV is the total worth to a business of a customer over the whole period of their relationship. It’s an
important metric as it costs less to keep existing customers than it does to acquire new ones, so increasing
the value of your existing customers is a great way to drive growth.

If the CLV of an average coffee shop customer is $1,000 and it costs more than $1,000 to acquire a new
customer (advertising, marketing, offers, etc.) the coffee chain could be losing money unless it pares back
its acquisition costs.

Knowing the CLV helps businesses develop strategies to acquire new customers and retain existing ones
while maintaining profit margins.

Measurement of CLV

If you’ve bought a $40 Christmas tree from the same grower for the last 10 years, your CLV has been
worth $400 to them. But as you can imagine, in bigger companies CLV gets more complicated to
calculate.

Some companies don’t attempt to measure CLV, citing the challenges of segregated teams, inadequate
systems, and untargeted marketing.

When data from all areas of an organisation is integrated however, it becomes easier to calculate CLV.

CLV can be measured in the following way:

1. Identify the touchpoints where the customer creates the value

2. Integrate records to create the customer journey
3. Measure revenue at each touchpoint
4. Add together over the lifetime of that customer

At its simplest, the formula for measuring CLV is:

Customer revenue minus the costs of acquiring and serving the customer = CLV

Customer Lifetime Value Model

Calculate average purchase value: Calculate this number by dividing your company's total revenue in a
time period (usually one year) by the number of purchases over the course of that same time period.
  First, we need to measure their average purchase value. According to Kissmetrics, the average Starbucks
customer spends about $5.90 each visit. We can calculate this by averaging the money spent by a customer
in each visit during the week. For example, if I went to Starbucks three times, and spent nine dollars total,
my average purchase value would be three dollars.

Calculate average purchase frequency rate: Calculate this number by dividing the number of purchases
by the number of unique customers who made purchases during that time period.

 The next step to calculating CLTV is to measure the average purchase frequency rate. In the case of
Starbucks, we need to know how many visits the average customer makes to one of their locations within a
week. The average observed across the five customers in the report was found to be 4.2 visits. This makes
our average purchase frequency rate 4.2.

Calculate customer value: Calculate this number by multiplying the average purchase value by the
average purchase frequency rate.

 Now that we know what the average customer spends and how many times they visit in a week, we can
determine their customer value. To do this, we have to look at all five customers individually, and then
multiply their average purchase value by their average purchase frequency rate. This lets us know how
much revenue the customer is worth to Starbucks within the course of a week. Once we repeat this
calculation for all five customers, we average their values together to get the average customer's value of
$24.30.

Calculate average customer lifespan: Calculate this number by averaging the number of years a
customer continues purchasing from your company.

 While it's not specifically stated how Kissmetrics measured Starbucks' average customer lifetime span, it
does list this value as 20 years. If we were to calculate Starbucks' average customer lifespan we would have
to look at the number of years that each customer frequented Starbucks. Then we could average the values
together to get 20 years. If you don't have 20 years to wait and verify that, one way to estimate customer
lifespan is to divide 1 by your churn rate percentage.

Calculate CLTV: multiply customer value by the average customer lifespan. This will give you the
revenue you can reasonably expect an average customer to generate for your company over the course of
their relationship with you.

 Once we have determined the average customer value as well as the average customer lifespan, we can use
this data to calculate CLTV. In this case, we first need to multiply the average customer value by 52. Since
we were measuring customers on their weekly habits, we need to multiply their customer value by 52 to
reflect an annual average. After that, multiply this number by the customer lifespan value (20) to get
CLTV. For Starbucks customers, that value turns out to be $25,272 (52 x 24.30 x 20= 25,272).