The lifetime value (LTV) or customer lifetime value (CLV) is a metric that indicates the average profit earned from the entire relationship with a customer and can be historic or predictive. The former sums the profit from all orders an individual customer has placed on your website since first interacting with it, while the latter predicts the lifetime value of a potential customer, based on available data.
The formula for calculating the CLV is as follows:
Average order value x Number of repeat sales x Average retention time
Let’s say you have an eCommerce website that sells flowers. Your typical customer orders four bouquets per year, averaging $70 per bouquet. Most of your customers stick around for 3 years, so the lifetime value, in this case, would be $70 x 4 (repeat orders) x 36 (months) = $10,080.
This formula takes into consideration the cost of acquiring and serving a customer and can be further broken down if you want to predict the CLV value per week, month or year.
