Customer Lifetime Value (CTLV)

The Customer Lifetime Value is a customer’s value to a company throughout the duration of their relationship. This metric is extremely relevant because in most cases it is more economical to maintain existing relationships with customers than to acquire new ones.

WHAT IS IT FOR? 🤔

The Customer Lifetime Value is interesting for all those companies that want to invest in marketingBusiness-to-business (B2B), also known as B-to-B, is a form of transaction between businesses, such ... More. Why do we advertise? In the end we want to acquire new customers. If I spend 100 euros I want to get a maximum of 200 euros (depending on the sector the margin is lower or higher). The vast majority of companies do not know what they can spend because they do not know the real value of a customer.

The calculations that are usually made to calculate the maximum cost of a customer acquisition campaign are based on a typical one-off sale. If I advertise to sell trips that carry a margin of 200 euros I try not to spend more than 100 euros in advertising to get an interesting profit. What is often not thought about is that the buyer might repeat in other purchases. If we suddenly realize that this customer will buy the same trip for three years instead of spending 100 euros, we could spend up to 300 euros. To do this and optimize the Customer Lifetime Value, the company must have a financial buffer large enough to finance the first year in which the relationship does not yet generate positive cash flow.

HOW TO CALCULATE CUSTOMER LIFETIME VALUE? 🔢

For 80% of companies and if we talk about start-ups will probably be 99% only the real CLTV makes sense. The simple Customer Lifetime Value does not take my costs into account and the discounted CLTV requires data on a very long customer relationship, which in start-up companies usually does not exist. So let’s pull out the figures to find out from the actual Customer Lifetime Value how much we could spend on marketing for the acquisition of a new customer.

CLTV actual = average purchase x frequency of purchase/week x membership x margin x 52

The Customer Lifetime Value is a dynamic data that changes according to the evolution of a company. Sometimes you also take the average of the results of different types of CLTV (simple, real and obvious).

Because Customer Lifetime Value provides more reliable information when a story already exists, it cannot always be applied to the world of start-ups. Besides the lack of data, financial stability is also necessary, because CLTV is based on a long-term profitability ratio that initially generates negative cash flows. Over time and with more data, the Customer Lifetime Value becomes a more robust and incredibly valuable metric for a company.