Feb 26, 2018
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