How do you find the Lifetime Value of a Customer (LTV)?
CLV also termed as customer lifetime value is the prediction of the profit value that will be attained as a result of the relationship of the customer. It can also be termed as lifetime value of customer (LTV).
CLV / LTV = (Annual Profit from the Customer x Number of years of the customer relationship ) - Initial Cost of Customer Acquisition
Let us consider the profit gained by a 5 year period customer as 10000 dollars and the initial cost to acquire the customer as 5000 dollars. What would be the lifetime value of the customer (LTV)?
Annual Profit of the Customer = 10000 $
Number of Years of Customer Relationship = 5 years
Initial Cost of Customer Acquisition = 5000 $
Substituting the values in the formula,
CLV / LTV = (10000 x 5) - 5000
= 50000 - 5000
= 45000 $.
Hence, 45000 $ is the customer lifetime value (CLV).