How to calculate lifetime value for a cohort?
A cohort is a group of customers acquired within a specific timeframe, sharing similar characteristics or experiences within that period.
Calculating the Lifetime Value (LTV) per customer for a cohort involves analyzing this group's behavior over time to predict the total net value each customer will bring to the business throughout their relationship.
Example:
An e-commerce platform observes that the cohort of users acquired in January 2022 has an annual retention rate of 90%, an average purchase frequency of 3 times per year, and a margin of ₹1,500 per order.
The year-1 LTV per customer for this cohort can be calculated using these metrics.
Step-by-step explanation:
To calculate the Lifetime Value per customer for a cohort, the following steps are typically taken:
1. Calculate the Retention Rate: This is the percentage of customers retained over a specific period.
2. Determine the Average Purchase Frequency: This indicates how often the customers make a purchase within a given period.
3. Find the Margin Per Order: This is the net value earned per order, usually calculated as revenue per order minus the cost of goods sold (COGS) and any variable costs associated with fulfilling the order.
4. Multiply these metrics together to estimate the LTV per customer for the cohort:
LTV per Customer for the Cohort = Retention Rate × Average Purchase Frequency × Margin Per Order.
Using the figures from the example:
LTV per Customer for the Cohort = 90% × 3 × ₹1,500 = ₹4,050.
This method offers a simplified approach to estimate the lifetime value per customer for a specific cohort, providing insights into the long-term value and behavior of users acquired during a particular time period.