[Quick Guide] What is Customer Lifetime Value and how to Calculate it
Acquiring a new customer costs money. I hope that isn’t news to you! But if you don’t know how much money each customer will bring to your business over her lifetime, how do you know if you are spending too much or too little to obtain each customer? If you are a business owner you should know the Customer Lifetime Value for your business – it will help you with your sales and marketing strategy.
What is it?
Customer Lifetime Value (LTV) represents the average monetary customer worth over her lifetime. In other words: how much money will one customer bring to your business on average before you lose her.
How To Calculate It
Take the average monthly profit per customer and divide it by the churn rate.
Need to know:
Gross Margin: A company’s total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage.
Gross Margin (%) = (Revenue – Cost of Goods Sold) / Revenue
Churn Rate: The percentage or customers who end their relationship with the company in a given period.
(LTV) Formula: (Average Monthly Revenue per Customer x Gross Margin per Customer) / Monthly Churn Rate
Average Monthly Revenue per Customer: $1,250
Gross Margin per Customer: 80%
Monthly Churn: 10%
LTV = ($1,250 avg monthly spend * 80% margin) / 10% monthly churn = $10,000 LTV
What This Means?
On average, each customer will bring $10,000 to your business before you lose her forever.
What Does It Matter?
Knowing the LTV can be very useful when determining how much money you should spend on sales and marketing to acquire new customers. Take a look at the LTV to CAC ratio and how it can help you with your business.
If you found this post useful, check out our Free Cheatsheet: 6 Marketing Metrics Your Boss Actually Cares About.