What is the difference between Lifetime Value and Customer Lifetime Value?
Oftentimes, these terms are used interchangeably, but there is actually an important difference. Customer Lifetime Value looks at a single customer, while general Lifetime Value is the aggregate measure of all customers.
First, what exactly is CLV a measure of?
What is Customer Lifetime Value (CLV)?
Customer Lifetime Value (CLV) is the expected revenue an individual customer would give a business throughout the relationship. This is a granular look at each individual, and can be used to draw conclusions about LTV.
What is Lifetime Value (LTV)?
Lifetime value (LTV) is the aggregate measurement of the total revenue expected from the average customer’s lifetime. This is a prediction metric for your customers in general to make predictions.
This is a look at each customer on average, to find how much money they will spend on your business in their lifetime.
How do you Calculate Lifetime Value?
There are a few different ways to calculate Lifetime Value; it depends on what analytics and data your business has access to…
Customer Lifetime Value = (Customer Average Revenue x Gross Margin) / Churn
For example, during a window of one month:
Each customer has an average revenue of $100 a month. There’s 75% gross margin, which means that 75% of revenue is profit. With a churn of 10% a month.
LTV = ($100 x 0.75) / 0.1 = $750
So the expected lifetime value of a customer is $750 for one customer.
If we had a high churn rate, like in e-commerce, we could expect even less per customer.
LTV = Average Purchase Value x Number of Repeat Purchases x Average Customer Lifespan
CLV = (customer value) x (organization’s average customer lifespan)
Another way to calculate (CLV):
CLV = (MRR / Number of paid subscribers) x Average Revenue per Account / Gross Contribution Per Customer
CLV = (Average Revenue Per Customer × Customer Lifespan) − Total Costs to Serve
Now that we know how to calculate it, let’s talk about how to use this data.
How is LTV used?
Lifetime value is a good measurement to pay some attention to for general budgeting.
You can compare LTV to other measurements like Cost Per Acquisition (CPA). When you know how much to expect to make from an acquisition, we can determine how low our CPA needs to be.
LTV also impacts price points and structure for your business. If your business price point isn’t high enough to turn a profit, this could indicate a required change.
If you decide your business needs to increase its LTV, how would we do that?…
How to Increase Lifetime Value
Increasing customer profit across the entire business relationship is important to the interest of making more profit per customer. Naturally, the way to do this would be to increase LTV.
While LTV isn’t necessarily the highest priority for optimization, generally increasing it can help improve your business as a whole.
Here are some other ways to increase LTV/CLV:
- Decrease Churn
- Decrease Product Development Costs
- Decrease Sales and Marketing Expenses
- Decrease Advertising Campaigns
- Use Loyalty Programs
- Targeted Marketing
One of the best ways to increase LTV is by reducing the churn of new and existing customers. This requires a strategy to retain customers and get people to keep coming back to spend money.
If your business is conducting one-time sales, then adding additional promotional offers to get customers to add items to their orders could be worthwhile.
Another way to get customers to stick with your business and increase their lifetime value is to target high-quality customers with personalized marketing.
To get a professional opinion on your business’s LTV or CLV, you may be interested in MPire Marketing’s services.