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Know What CLTV is, Its Functions, and How to Calculate It

Last updated: Sep 30, 2022

What is CLTV?

Customer Lifetime Value, or CLTV, is a metric that measures how valuable a customer is to a company throughout the business relationship between the two. The meaning of customer value is the average amount spent by consumers.

Measuring the lifetime customer value is done to find out how much total revenue a company can get from a consumer as long as the two parties are in a business relationship with one another.

The duration of a business relationship between a consumer and a company depends on the type of product sold, the way the customer consumes it, and many other factors. Therefore, each consumer's value can be different. 

The Functions of CLTV in E-commerce SEO

It is important for companies to know how much a consumer is valued in their business. There are a variety of benefits you may get from gaining such information, especially if you run an SEO e-commerce business. The three main uses of customer lifetime value are:

Identifying Trusted Customers

Potential consumers are those who have a high perceived value because they spend more and more of their money on your business. By knowing the value of each customer, you can focus on building relationships with potential customers.

Finding the Right Target Customer

If you already know what kinds of customer criteria are able to provide the most revenue for the business, then you can target consumers with similar personas. This way will allow your business to get more customers with a high value.

Help Improve Business Performance

Customer Lifetime Value is a metric that can help businesses grow even better. Without this measurement, you will not know how much consumers value your business that they are worth retaining.

Customer lifetime value also helps you to find out whether the Customer Acquisition Cost (CAC) used has brought in the right consumers so that the business is able to benefit from the costs incurred.

How to Calculate CLTV

If you want to know the value of a consumer, you must know how to calculate it. The formula for counting Customer Lifetime Value is quite simple, but you have to prepare some data first. Some of the data that must be prepared includes:

  • Average transaction value: the average amount of money spent by consumers in a single transaction. 
  • The number of transactions: the total number of transactions in a period.
  • Retention period: the length of the consumer's relationship with the company. 

If you have got the numbers in each of these data sets, then you can calculate the consumer lifetime value formula, which is:

Customer Lifetime Value = (average transaction value x number of transactions) x time period of retention

For example, consumer A always buys product X at a price of Rp10,000 per week for three months. The CLTV of consumer A is (Rp10,000 x 4 times per month) x 3 months = Rp120,000.

How to Increase CLTV

After calculating and knowing the consumer's lifetime value, you can already map consumers with the high and low scores. Consumers with high lifetime value scores are potential customers you should keep in touch with.

You can also increase the customer lifetime value to maximize your business revenue. Some strategies to increase the value of each customer are:

Marketing Strategy Optimization

By measuring customer lifetime value, you can find out what kinds of consumers are the most profitable for your business. Use that data to target new consumers with similar personas. This method makes your digital marketing strategy more effective because you only target potential consumers.

Improve Customer Experience

Customer experience, or user experience, is the experience that consumers or users get during a relationship with the company. A good customer experience will increase customer loyalty, so they will have a longer relationship with your business.

The longer the period of the business relationship between the consumer and the company, the higher the customer lifetime value is.

Maximizing the Onboarding Process

It is best not to lose potential customers after successfully measuring their customer lifetime value. Make sure that the service you provide has satisfied consumers so that they will return to make transactions again with you.

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