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Customer Lifetime Value (CLTV): How to calculate it in 5 minutes?

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Customer Lifetime Value (CLTV): How to calculate it in 5 minutes?

According to Bain & Company research on customer loyalty , companies with the highest loyalty rates grow 2.5 times faster than their competitors. The interesting thing is that one of the four main strategies they use to increase these indexes is the creation of systems to calculate the value of the customer lifetime, better known as the customer lifetime value (CLTV) . list_altIndex of contents
What is the Customer Lifetime Value (CLTV) and what is its importance?
How to calculate the Customer Lifetime Value? [formula]
How to improve the calculation of the value of the customer’s lifetime?
What decisions can you make when you know the lifetime value of a customer?
However, the vast majority of companies do not calculate the CLTV, which means that they do not have the critical information necessary to make strategic decisions. To better understand the context and importance of CTLV in modern companies, let’s analyze some insights obtained from the Customer Lifetime Value Report , carried out by active cell phone number list and RedEye : About the CLTV as a KPI : increasing the customer lifetime value is a priority for 76% of companies, but only 33% manage the CLTV as a KPI . This is because organizations are finding it very difficult to measure this indicator effectively with the data they have.
On retention vs. the acquisition : 91% of the companies affirm that investing in improving the CLTV, through strategies that promote retention, is more profitable than investing in the acquisition of clients. This is basically the main reason why customer lifetime value is so important to business.
On short- and long-term effectiveness : Converting prospects into customers is something that 77% of companies do with ease, but less than 65% are effective when converting customers into multiple buyers. This is where the challenge lies in improving customer lifetime value and prioritizing it over short-term acquisition and conversion rates.

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On data-driven decisions : more than 50% of companies say that the main tactic to improve CLTV is to optimize the use and analysis of data . This is because, as we said at the beginning, data-driven strategic decisions are highly effective and with minimal margins of error.About online marketing for CLTV : email marketing is the main online method used by companies (65%) to increase customer lifetime value , followed by personalization techniques (45%).
On the obstacles to increasing the CLTV : the main obstacles for companies are:
The limitations of customer data (38%).
The inability to measure CLTV (38%).
Poor integration of marketing tools (38%).
Isolated organizational structures (36%).
Regarding the level of maturity of the CLTV : only less than 1% of the companies have a high level of maturity in terms of the management of the CLTV, while more than 55% affirm that their level of maturity is basic or non-existent.
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If your company belongs to that more than 55%, I recommend that you continue reading this article to know in detail how to calculate, optimize and take Betting Email List of the customer lifetime value in your business.customer lifetime value cltvSource: EconsultancyWhat is the Customer Lifetime Value (CLTV) and what is its importance?
The customer lifetime value is a forecast of the amount of money that the company expects to receive from a user , for as long as this user continues to be its customer.In business, it is not enough to say that time is worth money . It is necessary to quantify as precisely as possible the monetary value that a consumer represents for the company as long as a commercial relationship exists.For example , are you a Netflix user? So your customer lifetime value is the projection that Netflix makes to try to predict how long you will stay as a subscriber and how much money you will spend in the company from the moment you subscribe to the moment you leave the subscription.

Therefore, according to the same Econsultancy report , 91% of organizations affirm that predictive analytics using AI is the most powerful technique to improve CLTV.Do you have questions about the ROI of inbound marketing? Access the complete PDF to solve themThus, the customer lifetime value is understood as the present value of all future money flows that the customer will deliver to the company.It takes as a reference the business model of Nespresso or Gillette : the CLTV involves all the purchases of coffee capsules or replacement of blades that a customer is expected to make over time.This context allows us to better understand why customer retention is more profitable than acquisition , since a loyal customer makes multiple purchases over time, while a customer who is only acquired, but not loyal, can make a single purchase and then go with the competition.Therefore, improving the lifetime value of the customer means increasing the amount of time that the customer is spending money on our business.In fact, some statistics on acquisition and retention indicate that attracting a new customer costs 5 times more than it does to retain an old one. This is due to all the money and effort invested in a consumer who, perhaps after the first transaction, may end up abandoning the brand.How to calculate the Customer Lifetime Value? [formula]
To better understand the procedure, let’s see how to calculate the customer lifetime value through an example:Suppose we have a coffee shop called Inbound Coffee , with which we have been in the market for some time and, therefore, we already have a historical record of our customers’ consumption.This is the average consumption per visit of 5 clients:

customer lifetime value formulaWe also have the number of times each of these clients come per week, which allows us to calculate the total expenditure per week for each client. So we are adding variables to the procedure.customer lifetime value examplesWith this information, we can already estimate an initial CLTV.For this, we are going to assume that the lifetime of our clients is 10 years (this number can be obtained from similar business experiences or researching in your industry).So, we apply the following formula:CLTV 1 = Gasto promedio por semana x Cantidad de semanas en el año x Cantidad de añosConsidering that a year has 52 weeks, then the lifetime value of an average customer would be:CLTV 1 = 10,68$ x 52 x 10
CLTV 1 = 5,554$

This is a simple way to have an approximation of CLTV for Inbound Coffee, although it really is very basic. We can see that in this initial calculation we are not considering the cost we assume to be able to deliver coffee and good service to our customers.So for a more accurate estimate we must include the contribution margin in the customer lifetime value formula.In this case, the final contribution margin is 25%. Therefore, a better estimate of the CLTV for our clients is obtained by the following formula:CLTV 2 = CLTV 1 x Margen de contribución
CLTV 2 = 5,554$ x 25%
CLTV 2 = 1,388$

As you can see, this last value of the customer’s lifetime is more conservative than the previous one and is a better guide if we use it to make business decisions in Inbound Coffee.How to improve the calculation of the value of the customer’s lifetime?
As we go deeper and deeper into the procedure, we can include the following two variables in the customer lifetime value formula:Customer retention rate for CLTV
The customer retention rate allows us to incorporate into our calculation the fact that some customers will not be with us for 10 years. They will probably cease to be our customers before that time due to multiple reasons.So, continuing with our example of Inbound Coffee, let’s assume that 75% of our coffee buyers do spend 10 years with us. In other words, our customer retention rate is 75%.On the other hand, it is also possible to listen on the dropout rate , or churn rate . This is only the inverse value of the withholding rate. That is, if our retention rate is 75%, then the attrition rate is the remaining 25%. This percentage represents clients who are less than 10 years with us.New Call-to-action
Discount rate for CLTV
The discount rate or “cost of capital” is the one that is applied to identify the present value of a payment that is going to be received in the future. That is, how much is a payment worth today that you will receive in a year, for example. This consideration is necessary taking into account that the value of money changes over time .The discount rate is inverse to the interest rate, because while interest consists of adding value to future money, what the cost of capital does is “discount” value to that future money, in order to determine its real value for today’s date.We better understand the importance of the discount rate for the value of the client’s lifetime through our Inbound Coffee business case : in the cafeteria we will receive the money from the clients over time (10 years), since obviously no client will pay Today all the coffees that you will consume during those 10 projected years. Therefore, using the discount rate, we can identify the value today of the coffee that the customer will buy from us on the last day of year 10, and of all the coffees to buy during that time.So, taking the interest rate as a reference , we see, for example, that if we receive $ 1000 today, we could place it in the bank and receive a higher amount within a year. In this way, if the interest rate offered by the bank is 2% per year, at the end of the first year we could withdraw $ 1020.Now, the discount rate helps us to determine, conversely, the present value of that future money. That is, those $ 1,020 futures actually have a present value (for today) of $ 1,000.Understanding the concept of present value is very important for our customer lifetime value projections , as this allows us to identify the current value of the cash flow that the customer will be contributing to us throughout his life as a buyer.Calculation of the CLTV with the retention rate and the discount rate
To calculate the value of the customer’s lifetime with both rates explained above, first, we have to know which discount rate we are going to use. There are several ways to find out:If your company has a Finance Area, you can ask directly what discount rate or cost of capital they use in the company, since it is a value that must already be determined, since organizations use the return that they have historically had on their investments or business.

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