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Customer Lifetime Value

Determining a customer lifetime value (CLV) will help you understand the worth of the future relationship with a customer. CLV is defined as the overall financial value of a customer relationship, based on the present and future net profit of the specific customer association. Ultimately, CLV can help you make critical business decisions about future sales, marketing, and other business development plans. In order to calculate the CLV for each customer, you will need three pieces of data: the average order value, the customer’s purchase frequency, and the customer value.

To calculate the average order value, take the total revenue and divide it by the total number of orders.

In order to calculate the customer value, you need to multiply the average order value by the purchase frequency.

Finally, the customer value is calculated by multiplying the average order value by the purchase frequency.

Once the customer value is identified, to calculate the final CLV, multiply the customer value by the average customer lifespan. Your average customer lifespan is the length of time a relationship lasts before they become inactive and ends the purchase affiliation with your business.

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