eCommerce CLV vs LTV: What's the difference?
08 December 2022
CLV vs LTV: What are they used for?
Customer Lifetime Value (CLV) and Lifetime Value (LTV) are some of the most important metrics for eCommerce and D2C brands, as they provide a measure of how well the business is doing in terms of customer engagement and revenue.
CLV and LTV can help businesses make changes to their marketing strategies that will ultimately result in increased revenue. In this blog post, we'll explore what CLV and LTV are, how to calculate them, and how they can be used to improve an eCommerce or D2C company's bottom line.
What is Customer Lifetime Value?
Customer Lifetime Value (CLV) is a metric used to measure the value of a customer over their lifetime with a company.
It measures how much money a customer brings into the business through purchases, subscriptions, or other activities over time. This number can be used as a prediction of future revenue earned from that customer.
Companies use this information to inform decisions on pricing, product development, marketing campaigns, and more.
How Do You Calculate CLV?
Calculating CLV requires looking at past customer behavior and data related to it.
The simplest way to do this is by taking the average amount spent per purchase multiplied by the average number of purchases made over time by that customer.
However, there are more detailed calculations that can be done for more sophisticated analysis.
For instance, companies might consider factors such as churn rate (the percentage of customers who leave within a certain period), customer loyalty (how likely customers are to return), or LTV-to-CAC ratio (an indication of how profitable each new customer relationship is).
By integrating these various pieces of information into a single equation, an accurate estimate of CLV can be created.
What is Lifetime Value?
Lifetime Value (LTV) measures the net profit that a business earns from its customers over their lifetime with them.
This metric encompasses not only any direct sales made but also recurring fees like subscription fees or membership costs which add up over time.
Additionally, intangible benefits like brand loyalty or referrals may also contribute to LTV if they can be quantified in some way as part of an overall calculation. Companies use this information to assess the relative profitability of different types of customers or strategies in order to allocate resources appropriately across channels or products lines.
How Do You Calculate LTV?
The basic formula for calculating LTV involves subtracting total costs associated with acquiring and serving the customer from total revenue generated from that same customer over the course of their lifetime with you.
To do this accurately requires incorporating all relevant transactional information such as purchase frequency, average purchase size and discounting rates when appropriate since these variables impact both costs and revenues differently depending on whether or not they're taken into consideration when making calculations about long-term profitability from customers..
Additionally incorporating factors like intangibles mentioned above will give you even better insight into your true long-term value from each individual customer relationship .
Which one should you use?
Short answer, both.
Understanding both Customer Lifetime Value (CLV) and Lifetime Value (LTV) is essential for any eCommerce or D2C enterprise looking to maximize its profits while still providing value for its customers over time.
By incorporating these metrics into your decision-making process you can make sure you’re always taking into account both short-term gains as well as long-term sustainability when evaluating different approaches or strategies for growing your business successfully.
With the right calculations performed consistently throughout your organization, CLV & LTV should become indispensable tools in helping you optimize your offerings & improving financial performance going forward.