Customer Lifetime Value (CLV, LTV or CLTV)

Customer Lifetime Value (CLV) usually predicts the total value an e-commerce business can expect from a single customer account. It considers the revenue generated by the customer and compares it to the expected lifespan of the customer. This calculation helps businesses identify valuable customer segments that are most beneficial to the company.

When calculating CLV in e-commerce, it is typically based on gross sales instead of profit. This is because obtaining profit metrics for these calculations is often more challenging, while gross sales are typically always available.

A common method to calculate CLV based on gross sales is to use the formula CLV = (Average Purchase Value x Purchase Frequency) x Average Customer Lifespan.

• Average Purchase Value is determined by dividing the total revenue over a set period by the number of purchases made.
• Purchase Frequency is calculated by dividing the number of purchases made over a set period by the number of unique customers who made purchases during that period.
• Average Customer Lifespan is the average number of years a customer continues purchasing from the e-commerce business.

By employing this formula, businesses often estimate the total gross revenue a customer will generate over their lifetime. This approach provides valuable insights into the potential value of customer relationships, extending beyond individual transactions or immediate profit. However, it is important to recognize that assuming all customers are identical often is misleading. Instead, a recommended approach for estimating newly acquired customers' value is utilizing an AI prediction model. This model enhances clarity by identifying which customers are more or less likely to yield significant value or become net negative customers for the e-commerce company in the worst-case scenario.

Dema offers an LTV Prediction Model, basing the customer's future value on actual profit and not just Gross Sales. You can read more about it here.

Read our complete guide: What is Customer Lifetime Value?