How do you calculate customer LTV?

Calculating this by customer segment (rather than a rate for all of your customers) is usually the most effective way to use this metric, so that's what we'll do in this example.

Say you're trying to find the customer lifetime value of your online customers.

To do this, you'll need to start by determining your average purchase value by taking the total value of all purchases within a timeframe and dividing them by the number of purchases within that timeframe.

So, if your online customers made 5,000 purchases during 2020, and they were worth a total of $20,000, your average purchase value would be $4.

You'll also need to find your online customers' average purchase frequency by taking the number of online purchases made during the year and dividing them by the number of customers who made a purchase online that year.

This means you'd take the 5,000 purchases and divide that by the 1,000 customers who made them, which would give you an average purchase frequency of five purchases per customer.

Next, you'll need to multiply your average purchase value by your average purchase frequency, which will give you your customer value. In this case, this would be 5 x $4, which gives you a customer value of $20.

While this is a valuable number to know as well, you're looking for your customer lifetime value, so you'll need to complete one more step: Multiplying the customer value by the average customer lifespan.

In this case, your customer value is $20, and say you know your online customers stick around and buy your products for an average of five years. You'd multiply $20 by five, which gives you $100. This is your customer lifetime value, and it means that each of your online customers is worth about $100 to your company.