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How to Calculate Customer Lifetime Value (LTV)

Customer Lifetime ValueCustomer Lifetime Value (the amount of profit or revenue a customer generates in their lifetime or a fiscal period) is one of the most important things your company can calculate.

But here’s the problem: There is no one sure-fire way to calculate. There are hundreds of different formulas out there ranging in complexity to fit everyone’s needs. Don’t worry, we’re here to help.

The key to CLV is calculating averages. Now, to be honest, my math skills aren’t that great and if I get too technical, it will be confusing. So here’s a few examples that are simple, easy and most importantly, logical. Also if you could not tell my calculus teacher about my math skills, that would be great too!

Example 1: The Dentist

Suppose you’re a dentist. You probably have each customer come in 2-4 times a year for a cleaning, and for other procedures (like fillings, root canals, etc.) the CLV is variable, depending on each patient. A simple CLV would be calculated as:

Average length of the relationship: 10 years

Average cost per procedure: $80

Average visits per year: 3 times

Customer Lifetime Value = 10 x 80 x 3 = $2400

Thus the lifetime value of a customer for the next 10 years, would be $2400. You can then multiply this by the number of customers you have to see what the lifetime value of your customer base is for the next 10 years.

Example 2: Golf Club

Our team loves golf, so this one is right up our alley. A golf club is another good example for CLV because of the memberships they offer. Let’s say this golf club also offers a store to buy or rent clubs, balls and whatever other items a member may need, added to the membership cost.

Average Membership Cost (per year): $6,245

Average length of relationship: 20 years

Average visits per year: 35 times

Customer Lifetime Value = (6,245 x 20) / 35 = $3,569 per customer

Here, since we have the amount of membership cost for a year, we divide it by the average number of times visited during that year. As you can see, this can start to get real tricky real fast. Luckily we’ve got two more examples just in case!

Example 3: Barbershop

Gotta be honest here, I’m in desperate need of a haircut, which is why I chose a barbershop. Also I don’t know all the in’s and out’s of a salon (even after having my co-workers tell me) but both can be calculated in the same way.

Average haircut cost: $16

Average visits per year: 4 times

Average length of relationship: 15 years

Customer Lifetime Value = 16 x 4 x 15 = $960 per customer

Over the next 15 years, the customer lifetime value would be $960 per customer. Say you have about 400 customers per year, then the LTV over the net 15 years (not taking expansion into consideration), would be $384,000.

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Example 4: Landscaping Business

We’re in the full swing of summer right now, so naturally, landscaping is at an all-time high. But how exactly do these businesses (whose owners only spend half the year here) keep the same customers? By the lifetime customers that come back every year.

Most people who use a landscaping business (If you don’t, I feel your pain and if it makes you feel any better I’ve got bushes and hedges to do when I get home) have a weekly appointment.

Average cost of all services (let’s keep it strictly maitenance): $150 per hour

Average hours per week: 2 hours

Average length of relationship (for the summer): 12 weeks

Average length of relationship: 5 years

Customer Lifetime Value: 150 x 2 x 12 x 5 = $18,000 per customer for next five years

Keep in Mind

Now this of course is a ballpark estimate. By using this logic and enacting averages into these calculations, we can get an idea of what the lifetime value of a business’ customers are for a certain time period.

Of course different people like different things. Some people use complex formulas, others go even more simple than this. For the purpose of understanding the basics of CLV and seeing how much value in profit or revenue a customer brings to a business, these are some situations and methods to guide anyone in learning CLV.

Do you have a different way of calculating CLV? Did you find this helpful?

Let us know in the comments below!

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