Lifetime Value (LTV) is a metric that helps companies understand the profitability of their customers. It’s calculated by dividing the sum of revenue generated by a customer over their lifetime by the cost to acquire them. In this article, you can find what LTV is, how you calculate it, and how AI can help you find new ways to find predicted lifetime value.
What Is Customer Lifetime Value?
A company’s customer lifetime value (CLV) measures how much it can expect to earn from a customer throughout its relationship. It’s calculated by multiplying the average value of each transaction by the number of times the consumer makes purchases.
The CLV is one of the most important metrics for businesses because it allows them to determine how much money they can expect to make from each customer. Companies can use this information to decide which customers are worth keeping, which ones aren’t, and how much they should spend on acquiring new customers.
Overview Of Customer Lifetime Value
CLV is the total revenue a consumer may create during their lifetime. Understanding what makes each client worth investing in and how much it takes to get them helps you decide whether to extend an offer or invest in existing customers.
The longer you know a customer, the more data you have about them, which means you’ll be able to calculate their CLV more accurately—and get an idea of how valuable they might be in the future! To measure this accurately, though, people need some way of figuring out precisely what each person is worth at any given time:
Improves Customer Experience And Supply Chain Management
Predictive analytics can be used to improve customer service and supply chain management in a variety of ways.
One standard method is to use predictive analytics to predict the lifetime value of a customer, which can then determine how much investment should be put into a particular customer. This can help companies decide how much money they should spend on marketing, for example, or how much time they should invest in developing new products.
This information can also be used for supply chain management by making predictions about what customers want and need so that companies can decide which products to develop and how much inventory they will need.
What To Include When Calculating CLV?
To get an accurate picture of the value of a customer over their lifetime, you need to factor in the items on the following list:
- Average order value
- The average number of orders
- The average number of repeat purchases
- The average number of new customers acquired by channel (i.e., digital media vs. physical stores) and any differences between them
- Advertising, sales teams, and more are included in each channel’s client acquisition cost. Seasonal patterns may cause these expenditures to change over time; therefore, consider this when estimating your CLV. Have refund and return charges (if applicable).
How To Use AI For Understanding And Calculating CLV?
- Identify the right customers
- Understand how long they stay
- Understand what drives customer retention
- Calculate predicted lifetime value based on your business model and KPIs
Predictive analytics helps firms predict future events. Most firms manage KPIs using historical data, and this information is needed for client communication and future planning. Predictive data can also foretell economic changes. Lifetime value is the revenue a customer brings in over their lifetime with your company. It’s a key metric because it helps you determine whether or not a customer will be worth investing in.