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# What is Customer Lifetime Value, and Why Does it Matter?

Kate Connors
June 2, 2022

Understanding the value of your customers is at the heart of running a successful ecommerce business. Knowing how much customers are likely to buy, and how often, helps you create a sustainable business and informs the types of products you offer in your store. Two key metrics that inform this understanding are lifetime value (LTV), and customer lifetime value. Let’s break down what they are, how to calculate them, and why they matter.

## What is lifetime value (LTV)

Lifetime value (sometimes referred to as LTV) is the total amount of revenue your business can expect to earn from one customer over the course of your relationship with that customer.

## How to find lifetime value (LTV)

Lifetime value (LTV) can be a complicated metric to calculate, depending on the number of customer touchpoints incorporated into the measure. But, the metric boils down to three inputs that can be multiplied to produce an average lifetime value.

### 1. Average order value (AOV)

AOV refers to the average amount a customer spends on a purchase with your business. You can calculate this number for your entire customer base by taking an average of all of your order values. To produce a more nuanced AOV number, you could segment your data into different customer segments based on your customer profiles and calculate an average order value for each segment.

### 2. Average number of transactions per period

This number is the average number of purchases a customer makes in a certain period. For example, the average number of transactions per period for a grocery store may be 1 purchase/week. For a coffee shop, the number might be closer to 3 purchases/week.

### 3. Average customer retention period

The average customer retention period is the amount of time you’d expect a customer to be a customer of your business. You can find this number by examining the behavior of your customers to see when they make their first purchase and when they make their last purchase with your business.

To calculate lifetime value, multiply all three of your numbers: AOV, average number of transactions per period, and average customer retention period.

• AOV = \$50
• Ave. transactions per period = 1/week
• Ave. retention period =  5 years

### Then your LTV calculation would look like this:

(\$50) x (52 purchases per year) x (5 years) = Lifetime Value of \$13,000.00

## How to find customer lifetime value (CLV)

• LTV = \$13,000
• Margin = 50%

### Then your CLV calculation would look like this:

(\$13,000) x .5 = Customer Lifetime Value of \$6500