Measuring "Customer Churn Rate" & "Customer Lifetime Value" (LTV, CLV)

Customer Lifetime Value (LTV, CLV, CLTV)

What is Customer Lifetime Value?

The Customer Lifetime Value (LTV, CLV or CLTV) measures the total value (in revenues or in margin) you can expect from a customer across its entire commercial relationship with you.

 

Why measuring Customer Lifetime Value?

Knowing the total value you can get from a customer will allow you to precisely know:

  • How much you can invest in marketing campaigns to acquire new customers
  • How much ROI you can expect per customer on the long term
  • How long it takes for a customer to become profitable vs the marketing costs related to his acquisition

Now, if you look at the Customer Lifetime Value at the Cohort level of detail (Cohort = Year when a customer was acquired), you will be able to assess your ability to gradually develop the total Lifetime Value of your customers across time.

 

How to compute Customer Lifetime Value?

A "Customer Lifetime Value" is not the result of a magical formula but is the result of a detailed and advanced analysis of your existing customers.

 

Challenges

Measuring LTV is a true functional (and technical) challenge since you must take into account:

  • Actual lifetime of customers base: the LTV at 5 years must be based on running total value of customers who have at least 5 years relationship with you
  • Existing sales behavior of all customers across time: the LTV at 5 years cannot only consider customers with at least 5 years relationship but must also consider the fact that the following cohort (more recent customers) might be of higher potential

 

Calculation / Formula

The Customer Lifetime Value for Year "N" is computed as follows:

[Customer Lifetime Value for Year "N-1"]

Plus

( [Revenues (or Margin) in Year "N" for Customers having at least "N" years of lifetime]     Divided by     [Customers having at least "N" years of lifetime] )

 

This calculation is automatically computed in our Sales dashboard template and available in this dataviz.

 

Visualizing the Customer Lifetime Value

A typical way to visualize the Lifetime Value is to show its evolution across years:

Visually, it will (almost) always reach an asymptote allowing you to predict an absolute lifetime value even when you mostly have recent clients.

 

A more advanced analysis of the LTV is to look at it at cohort level (Cohort = Year of Client creation date):

(this screenshot is taken from another dataset. In a real world, figures will for sure match with previous screenshot)

And if you want to go even (far) further, you can look at LTV at month level by cohort :-)

Contact those expert guys who know exactly how this chart can boost your marketing results.

 

 

Customer Churn Rate

What is Customer Churn Rate?

The Customer Churn Rate measures the share of Lost Customers from one year to another.

 

Why measuring Customer Churn Rate?

The Customer Churn Rate typically highlights your (in)ability to retain customers.

 

How to compute Customer Churn Rate?

Challenges

Measuring Customer Churn Rate is a challenge since you must take into account:

  • Actual lifetime of customers base: you will be able to assess the Churn Rate for a given year N, only 12 months afterwards, and for customers having at least N+1 years of lifetime
  • Existing sales behavior of all customers across time: you must take into account returning customers after more than 1 year

 

Calculation / Formula

The Customer Churn Rate for Year "N" is computed as follows:

( [Customers having at least "N+1" years of lifetime, having generated revenues in Year "N"]    Minus    [Customers having at least "N+1" years of lifetime, having generated revenues in Year "N+1"] )

Divided by

[Customers having at least "N+1" years of lifetime, having generated revenues in Year "N"]

 

This calculation is automatically computed in our Sales dashboard template and available in this dataviz.

 

Visualizing the Customer Churn Rate

A typical way to visualize the Customer Churn Rate is to show its evolution across years:

 

 

 

Customer Lifetime

There are mostly two ways to measure "Customer Lifetime" in years:

  • Duration since Customer Registration
  • Duration since Customer First Sales Date

Depending on your business model or the available data you have, you might consider one or the other.

In our Sales dashboard template, we measure the Customer Lifetime based on Customer First Sales Date.

In our Digital Strategy for Start-up dashboard template, we measure the Customer Lifetime based on Customer Registration Date.