How to calculate customer lifetime value

Nurturing customer lifetime valueOne fundamental measure an organization needs to establish is lifetime value, or rather, long-term value (LTV) of its customer population. Marketing managers use this for acquisition campaigns, retention campaigns and product/brand strategy. e.g. LTV is used to assess the cost of customer attrition. LTV is also used to build the business case for acquisition campaigns. Review the steps for LTV calculation below and download free LTV calculation tool.

First you need this foundation

 

The basic steps are as below.Lifetime value calculation screenshot

    1. Set Baseline: Define customer-base. Do this for your preferred segmentation (such as behavioral segments or brand relationships).
    2. (Optional) Refine: It may be necessary to filter the baseline population on outliers. For example,employees should be excluded from the baseline.
    3. Enter measurements: Enter count of customers, their orders and reported sales year over year. Input costs data (as % or absolute $’s).
    4. Calculate LTV: LTV=(Total Revenue – Cost of Sales – Marketing Cost)/Originally acquired number of customers; Typically 3-5 years for most B2C retail.
    5. (Optional) Long term forecasting: Use a basic tool like MS Excel’s charting utility to find the growth trend of LTV. This can be handy if you only have historical data for a few years and want to calculate LTV for a longer period. See chart below.

LTV Calculator forecasting formula

 

LTV Calculation is necessary for customer relationship management. Use it in designing your acquisition campaigns, retention campaigns and product strategy.

Download the worksheet below to do the calculation on your data.

Download LTV Worksheet

 

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