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CLTV stands for "Customer Lifetime Value," which is a financial metric used in innovation to estimate the total revenue a customer is expected to generate for a business over the duration of their relationship. This includes all of the customer's purchases and any other interactions with the business, and is used to determine the potential long-term value of acquiring and retaining customers.
To estimate the total revenue of a customer, you can use the following formula to calculate the Customer Lifetime Value (CLTV):
CLTV = (Average Value of a Sale) x (Number of Repeat Transactions) x (Average Retention Time)
Step-by-Step Guide:
Customer Lifetime Value (CLTV) estimates the total revenue a business can expect from a single customer over the entire duration of their relationship.
1. Calculate Average Purchase Value
Formula:
Average Purchase Value = Total Revenue / Number of Purchases
2. Determine Average Purchase Frequency Rate
Formula:
Average Purchase Frequency = Total Purchases / Number of Customers
3. Calculate Customer Value
Formula:
Customer Value = Average Purchase Value × Purchase Frequency
4. Determine Average Customer Lifespan
This is the average time a customer continues to purchase from your company (usually in years).
5. Calculate CLTV
Formula:
CLTV = Customer Value × Average Customer Lifespan
6. Interpret the CLTV
High CLTV: Indicates long-term profitable customers.
Low CLTV: Suggests the need to improve retention or purchase frequency.
Example:
A great example of a company that effectively applies Customer Lifetime Value (CLTV) Calculation and isn't on the list is Chewy.
How Chewy Uses CLTV:
- Focus on Customer Service:
Chewy, an online pet supply retailer, prioritizes excellent customer service, offering personalized assistance, handwritten notes, and even custom artwork for loyal customers. This approach significantly increases the customer retention rate and extends the average customer lifespan.
- Subscription-Based Model:
Chewy offers a subscription service called Autoship, which ensures that customers receive their pet supplies regularly. This increases purchase frequency and predictability, directly contributing to a higher CLTV.
- Personalization:
By using data on customer preferences and their pets’ needs, Chewy tailors product recommendations and offers, encouraging repeat purchases and increasing the overall value of each customer.
Chewy’s focus on long-term customer relationships, subscription models, and personalized experiences makes it a prime example of how businesses can leverage CLTV to drive sustainable growth.
For more information on the topic, please see the source below:
Blattberg, R.C., Kim, BD., Neslin, S.A. (2008). Customer Lifetime Value: Fundamentals. In: Database Marketing. International Series in Quantitative Marketing, vol 18. Springer, New York, NY. https://doi.org/10.1007/978-0-387-72579-6_5
Ali, N., & Shaban, O. (2024). Customer lifetime value (CLV) insights for strategic marketing success and its impact on organizational financial performance. Cogent Business & Management, 11(1). https://doi.org/10.1080/23311975.2024.2361321
#CLTV #CustomerLifetimeValue #CustomerValue #FinancialMetrics #RetentionAnalysis
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