Calculate Customer Lifetime Value Fast and Easy

Learning to keep track of customer lifetime value is crucial for businesses to last. Customer retention is far more important than attracting new customers, and according to Business2Community, it’s cost-effective and saves time. It might seem daunting at first to calculate customer lifetime value, but don’t fret! We have compiled five easy steps below to help you out. For a short summarized infographic, click here!

1. Calculate average purchase value

First, you need to calculate the money spent by a customer in one week. Using an imaginary restaurant example, say a customer visits this restaurant 3 times a week and the cost of one coffee at that restaurant is always 2.50. Divide the total revenue, which is 7.50 (3*2.50) by the number of orders (3), and our average purchase value is 2.50.

Once we have the average purchase value for one customer, we can repeat the process until we have this information for all the surveyed customers. In this case, let’s say we survey five customers and their average purchase values are 2.50, 2.75, 2.80, 3.30 and 3.50. The APV would be 2.97.

Once the average purchase value has been calculated for all five customers, add all the averages together, and divide them by the number of customers surveyed. In a case study of Starbucks, the APV across 5 customers was 5.90.

2. Calculate the average purchase frequency rate

Next, in order to calculate CLTV, the average purchase frequency rate needs to be calculated. In the case of Starbucks, the average frequency rate was 4.2. In our restaurant example, we will say the average observed across the five customers visiting the restaurant was found to be 3.6 visits. That makes the average purchase frequency rate 3.6.

3. Calculate the average customer’s value

Now that we know the Average Customer Value and the APV and the APFR, we can easily find the average customer’s value. Simply multiply APV by APFR to find this sum. 2.97x3.6 is approximately 10.7, so the average customer value is 10.7.

4. Calculate the average customer’s lifetime span

In order to calculate the average customer lifespan, we need to observe how long a customer in question has been visiting a business. Using our restaurant example once again, to get a quick average of this, we look at the number of years that customers have been visiting the restaurant.

Still using five customers as an example sample size, we can add the averages of all of them and divide by five. Let’s say the averages of the five customers were 15, 13, 15.5, 12, and 11. In the case of the restaurant, the average customer lifespan among the five customers observed would be 13.3 years.

5. Calculate customer lifetime value

Once you have found average customer value and average customer lifespan, this data can be used to find Customer Lifetime Value. In our restaurant example, we found the APV to be 2.97. Our ACL was found to 13.3. Multiply CV BY ACL, but first, since we are observing weekly habits, this needs to be multiplied by 52 as well to exemplify this. 10.7 x 13.3 x 52. So in this case, the customer lifetime value is approximately 7400 per person.

That’s all there is to it! If you want to find out more about tips on how to improve customer lifetime value in your business, check out this blog for some tips and tricks!