Understanding how much revenue a customer will generate throughout their relationship with your business – their Customer Lifetime Value, or CLTV – is fundamental to smart marketing investment. It’s not just a vanity metric; it directly informs how much you can profitably spend to acquire new customers and how much you should invest in retaining existing ones. Many Australian SMEs underestimate this, leading to inefficient marketing spend and missed growth opportunities.
Calculating CLTV doesn’t require complex data science. While sophisticated predictive models exist, a solid estimate can be achieved with relatively simple calculations. The core principle is to forecast the net profit attributable to the future relationship with a customer.
- Average Purchase Value: Start by determining the average amount a customer spends each time they buy from you. This is straightforward from your sales data.
- Purchase Frequency: How often does a customer make a purchase? Again, your sales records hold the answer. Consider seasonality – a swimwear retailer will have higher frequency in summer.
- Customer Lifespan: This is the trickiest part. How long will a customer continue to buy from you? Look at historical data – how long do customers typically remain active? If you’re a newer business, industry benchmarks can provide a starting point.
- Profit Margin: Don’t use revenue; use profit. Calculate the percentage profit you make on each sale. This ensures your CLTV reflects actual profitability, not just top-line income.
A basic CLTV formula is: (Average Purchase Value x Purchase Frequency x Customer Lifespan) x Profit Margin. For example, if a customer spends $100 on average, purchases four times a year, remains a customer for five years, and your profit margin is 20%, the CLTV is ($100 x 4 x 5) x 0.20 = $400.
Remember this is an estimate. Segmenting your customers – by product purchased, acquisition channel, or demographics – will yield more accurate CLTVs for each group. For instance, customers acquired through social media might have a different lifespan than those from search engine marketing. Regularly review and refine your CLTV calculations as your business evolves. In 2026, with increasing data availability, we anticipate more SMEs will leverage cohort analysis to improve CLTV accuracy.
Ultimately, accurately calculating CLTV empowers you to make data-driven marketing decisions. Knowing your CLTV allows you to confidently allocate budget, prioritise retention efforts, and maximise your return on investment. Your next step should be to gather your sales data and begin calculating CLTV for your key customer segments.
