Customer Lifetime Value (CLV)

Definition:

The total amount of revenue a customer is expected to generate over their lifetime

Example:

Let’s say you run an e-commerce store that sells electronics. A customer named John has made three purchases from your store in the past year, totaling $200, $300, and $400, respectively. Based on your analysis of historical data, you estimate that the average customer makes five purchases over a three-year period before churning.

To calculate John’s CLV, you can use the following formula:

CLV = (Average Purchase Value x Number of Purchases per Year x Average Customer Lifespan)

In this case, the Average Purchase Value is (200 + 300 + 400) / 3 = $300, the Number of Purchases per Year is 5 / 3 = 1.67, and the Average Customer Lifespan is 3 years.

Plugging these values into the formula, we get:

CLV = $300 x 1.67 x 3 = $1,005

So, John’s CLV is estimated to be $1,005. This means that you can expect John to generate approximately $1,005 in revenue over the next three years before churning, making him a valuable customer to retain.