Understanding value: definition of Customer Life Time Value (CLTV)

by our E-Commerce Agency Optimize 360

CLTV ( Customer Life Time Value )

A company's success depends to a large extent on its ability to create and maintain lasting relationships with its customers.

An essential metric for measuring this skill is the Customer Life Time Value or Customer Life Value (CLV).

In this article, we're going to explore the different facets of this measure and some methods for optimising it.

Definition of Customer Life Time Value (CLTV)

Customer Life Time Value (CLTV), also known as CLV or simply Customer Lifetime Value (CLV), represents the total value that a customer can bring to a company over the entire duration of its relationship with that company..

It makes it possible to estimate the future profits generated by a customer and to assess their relative importance for the company, with the aim of better focusing marketing and loyalty efforts on the most profitable customers.

Why is CLTV important?

There are three main reasons why CLTV is so important:

It helps to identify your most valuable customers, who you should look after to increase their satisfaction and keep them.
It helps you to understand whether your marketing investments are really paying off and whether or not you need to adjust your targeted marketing strategy.
It provides a solid basis for making effective cost and investment decisions over the long term.

Now that you know why Customer Life Time Value is crucial for your business, it's essential to know the different methods that exist for calculating it.

A simple CLTV formula

The first method uses a relatively simple formula:

CLTV = Average value of a transaction Average number of transactions Customer lifetime

To determine the average value of a transaction, add up the amounts spent by all your customers over a given period, then divide by the total number of transactions over the same period.
Next, determine the average number of transactions by adding up all the transactions made by a typical customer over the course of their "life cycle". Divide this figure by the number of customers you have at the end of each period (month, quarter or year).
Finally, assess the lifetime of the customer based on your company's historical data or available sector benchmarks. You can consider an active customer to be one that has carried out at least one transaction during the period analysed.

Once you have estimated these three variables, multiply them together to obtain the CLTV.

Let's take a concrete example:

Imagine you own an online shop selling women's clothing. You make the following calculations:

Average transaction value: €50
Average number of transactions: 5
Customer lifetime: 2 years

Applying the above formula, the CLTV is equal to :

CLTV = €50 5 2 = €500

This means that the average customer adds €500 of value to your company during their relationship with you.

Refine the CLTV estimate by including various factors

The previous formula does not take into account a number of important factors, such as the costs of acquiring and retaining customers, the retention rate or variations in buying behaviour over time. To take these parameters into account, more complex mathematical models can be used, including :

Projections of future revenues under different assumptions (growth, stagnation, decline).
Demographic and behavioural data for each customer segment, so that we can adapt our offer and marketing investments accordingly.
Analyses of the competition, market trends and product developments to anticipate future changes.

Using these models can provide a more accurate and realistic estimate of CLTV, providing a solid basis for guiding your strategic decisions in the future.

Ways of improving the CLTV

As well as calculating Customer Life Time Value, it is essential to work on maximising it. Here are a few ways of improving this value:

Build loyalty among your customers by creating a strong bond with them through a user experience positive and differentiated.
Optimise your offering by proposing complementary products or services that meet the specific needs of your different customer segments.
Set up referral programmes to encourage your satisfied customers to tell others about you and attract new customers.

Customer Life Time Value is a powerful tool for steering your business towards success. With a clear understanding of the value potential of each of your customers, and by implementing targeted actions to increase their loyalty and satisfaction, you can optimise the profitability of your business over the long term.