What is customer lifetime value (CLTV)
Customer lifetime value is expected total income you can expect from an average customer over their future relationship with your business. Because CLTV is a forecast of your customer's future activity, it's more difficult to quantify compared to a customer's past profitability, but it can be immensely useful in shaping marketing strategies. The simplest way to calculate your customer lifetime value is Average Cart Price x Average # of Purchases per Customer x Average Customer Lifetime. Be sure to use the same unit of time across the entire calculation.
Why should you calculate customer lifetime value?
Measuring your CLTV allows you to employ informed strategies in regards to pricing, marketing campaigns and customer retention and align them with your goal of reducing costs while increasing profit. Once you know what you can expect to earn from a typical customer or a group of similar customers, you will know where to increase or decrease spending when it comes to customer acquisition. Knowing your CLTV also allows you to forecast expenses versus income and to keep up with customer demand.