What is customer lifetime value?
We all stumble through life clutching onto the fuzzy memories of those pesky Pythagoras and algebraic theorems that haunted many a youth, and—with rare use cases in present day life—they normally end up getting filed and forgotten.
Enter customer lifetime value: the only equation you need to remember.
In ecommerce, CLV is the value a customer contributes to your business over their entire lifetime at your company.
The main methods of calculating CLV are split between historic and predictive CLV:
Historic CLV (Good indication of CLV)
Simply the sum of the gross profit from all historic purchases for an individual customer.
Predictive CLV (Great indication of CLV)
A predictive analysis of previous transaction history and various behavioural indicators which forecasts the lifetime value of an individual. As long as the equation is accurate, this value will become more accurate with every purchase and interaction.