CLTV formula
What is the CLTV (Customer Lifetime Value) formula?
Customer Lifetime Value (CLTV or LTV) is a key ecommerce metric that estimates the total revenue a business can expect to earn from a customer over the duration of their relationship. When assessed alongside metrics like Customer Acquisition Cost (CAC), Average Order Value (AOV), retention rate, and churn rate, CLTV provides valuable insight into the overall financial health and long-term sustainability of a business.
Common formulas for calculating CLTV
There are several ways to calculate CLTV, depending on the data available and the level of accuracy required. Some commonly used formulas include:
- Annual revenue per customer ÷ Customer churn rate
- Average order value × Purchase frequency × Average customer lifespan
- Average purchase value × Average number of purchases
Businesses can choose to calculate historical CLTV (based on past customer behaviour) or predictive CLTV (based on projections for current or future customers).
Why measure CLTV over time?
Tracking CLTV over time enables businesses to spot trends in customer behaviour and assess the effectiveness of retention efforts. Understanding shifts in lifetime value can help brands fine-tune their customer experience, marketing strategies, and product offerings in order to extend the customer lifespan and boost long-term profitability.
Strategies for increasing CLTV through customer loyalty
To maximise CLTV, ecommerce and subscription brands should prioritise customer loyalty by offering flexible and user-friendly experiences. For example:
- Allowing subscribers to skip deliveries, swap items, or add one-off purchases
- Simplifying the process of cancellation or rescheduling
- Implementing loyalty programmes that offer rewards such as discounts, free shipping, or early product access
By removing friction from the shopping experience and rewarding repeat customers, brands can foster stronger relationships, reduce churn, and increase the total revenue each customer generates over time.
