Setrics Tracker How to Calculate Customer Lifetime Value | Savavo

How to Calculate Customer Lifetime Value (CLV or LTV)

Oct 26, 2016

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Posted In : Marketing Tips

The laws of regular business growth are completely different than the laws of profitable business growth. The laws of regular business growth are centered in traffic and conversions while the laws of profitable growth are centered in math and science. Here is the math you should know in order calculate Lifetime Value (LTV or Customer Lifetime Value/CLV). This is the most important metric in your business and you should always know it. LTV is made up of three concepts:

1) Average Revenue Per Customer Lifetime (ARPCL) How much does a customer, on average, spend with you on the top-line in an average lifetime?

EX. I am an I.T. company doing manage services. Inside ARPCL my average customer spends $520 per month with me. My average customer stays 17 months. $520 x 17 mo. = $8,840 ARPCL

2) Gross Margin (GM) Cost of fulfillment – What does it cost me to fulfill on an order when an order comes in? What the customer pays you – COGS (Cost of Fulfillment) = Gross Profit. Gross Margin is Gross Profit expressed as a percentage. I sell a bottle of water for $1, and it cost me 10 cents to produce the bottle of water. The Gross Profit is 90 cents, or 90% Gross Margin. 1 – .10 = .90

EX. My I.T. company’s GM is 50%.

3) Referral Multiplier (RM)How many customers come when you acquire one? 

EX. At my I.T. company the RM is 2 which means for every one customer I acquire, that customer brings me one more customer that I don’t have to go find.

ARPCL = 8,840

GM = 50%

RM = 2

8,840 x .5 x 2 = 8,840 LTV

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