How to know the CLTV of your business?

How to know the CLTV of your business?

Claudia Roca

Jul 3, 2022

Jul 3, 2022

Jul 3, 2022

How to know the CLTV of your business?
How to know the CLTV of your business?
How to know the CLTV of your business?

You have probably heard the phrase "it's more expensive to acquire a new customer than to re-sell to a customer who has already bought from us" more than once. Well, this phrase is closely related to the idea of Customer Lifetime Value (CLTV).  If we do things right, when we acquire a customer, it's very likely that this customer won't buy from us just once, but will buy from us several times. The frequency at which they buy from us will of course depend on our business model and the product or service we are offering. 

It's not the same to have an ecommerce of handbags than to have a SAAS type company in which every month our customer must pay a fee in exchange for the service we offer. 

To understand how much money a customer gives us throughout his life, that is, what is the real value of that customer for our business once we acquire him, there is the CLTV formula and in today's article we are going to explain everything about it. 

Take out some paper and a pencil! Ready? Here we go!

What is CLTV and how is it calculated?

CLTV Definition

Let's start by defining what CLTV is. As the acronym indicates, we are talking about Customer Lifetime Value: it's the economic value generated by the customer throughout his life with us.

However, in many marketing books or blogs, only one formula is often used to calculate CLTV. The reality is that we must make some adjustments to the formula depending on our business model. 

As we said at the beginning, CLTV in e-commerce is not the same as in SAAS. Let's look at the difference: 

  • If we have an e-commerce selling products or services where a customer buys from us 3 to 5 times at most, to obtain the CLTV we must multiply the average ticket of our business, by the average number of times a customer buys from us, by the gross profit margin we get on each sale.  Let's say we sell handbags. Our average ticket is 50 usd and each customer buys from us on average 2 times. Our gross margin on each sale is 35%. Then the CLTV is: 50 x 2 x 35 = 3500. On average, a customer spends 3500 usd throughout his life with us. 

CLTV Formula
  • If we have a recurring business, like a SAAS for example, the formula changes slightly. Here we need to take into account the value of the fee paid monthly (ARPU) and the amount of time the customer stays with us over his lifetime (LIFETIME). It would be something like this:

CLTV Formula

Let's take as an example a project management software such as Monday or Click Up. The average monthly fee is 8 usd and customers stay on the platform for an average of 12 months. Assuming that the gross margin is 50%, the calculation would be: 8 x 12 x 50. That is, on average, the CLTV is 4800. 

Why should you calculate the CLTV?

Benefits CLTV

The interesting thing about calculating the CLTV and understanding all its parts is that we have in sight the key metrics that we must work on in order to improve our profitability. 

Based on these numbers we can think of strategies to increase the gross margin or the number of purchases or the customer Lifetime. We can even think of strategies for the average ticket to increase. All these strategies help us improve the CLTV and therefore, the profitability of our business will be better and better. 

In addition, this formula allows us to easily realize where we are failing. Perhaps we'll see that we have a very low fee and we must increase it for the business to be profitable or on the contrary, we add many customers but in the third month of service they drop out, so we need to think of strategies and add value to change that situation. In short, it's a matter of having all this information on hand to be able to balance and make better decisions for our business. 

How to improve your business's CLTV 

Now that we have seen what CLTV is all about, how it is calculated and the advantages of having it always in sight, let's see how we can improve it. 

One of the best ways to increase CLTV is to work on increasing the number of times a customer buys from us during his lifetime or, in the case of recurring businesses, to increase the amount of time he stays in our business. 

Of course, there are businesses where this doesn't make much sense because they don't sell products or services that are usually purchased more than once, for example, real estate or automobiles. Most people are not buying houses and cars every month or every two or three months. 

However, in e-commerce or recurring businesses you can indeed pursue strategies with these types of objectives. For example: 

  • Include discount coupons for future purchases

  • Focus on having exceptional customer service that makes you stand out from the competition. 

  • Work on email marketing strategies to personalize offers according to the interests and tastes of your customers. 

  • If it's a recurring business, add news and benefits periodically to make the customer fall in love all over again, so he/she decides to stay with you. 

These are just a few ideas but of course there are many more. The key is to understand that these numbers will help us to think about these types of strategies and improve the profitability of our business. 

What other strategies can you think of to improve CLTV in your business? Let us know in the comments!