Customer lifetime value (CLTV) and customer acquisition cost (CAC) are important components of modern marketing and business strategies. These metrics help us understand the total value a customer brings to the company and the cost of acquiring that customer. In this blog post, we will detail the concepts of CLTV and CAC and focus on the basic CLTV calculation project.
What is CLTV?
Customer Lifetime Value (CLTV) is an estimate of the total revenue a customer will provide to a business over the course of their relationship with the business. CLTV is used to better understand customer relationships and increase customer loyalty.
Important CLTV Components:
Purchasing Frequency: How many times the customer makes purchases in a certain period of time.
Average Order Value: How much the customer spends on average for each purchase.
Customer Lifespan: The duration of the customer's relationship with the business.
Gross Margin: The profit margin obtained from customer expenditures.
What is CAC?
Customer Acquisition Cost (CAC) refers to the cost to the business of acquiring a customer. These costs include spending on marketing and sales activities. CAC calculation is used to evaluate the effectiveness of marketing campaigns and optimize customer acquisition strategies.
CAC Calculation Method: CAC=Total Number of Acquired CustomersTotal Marketing Expenditures CAC=Total Marketing ExpendituresTotal Number of Acquired Customers\text{CAC} = \frac{\text{Total Marketing Expenditures}}{\text{Total Number of Customers Gained}}
Total Marketing Spend: The total amount spent to acquire customers in a given period.
Total Number of Acquired Customers: The number of customers acquired in the same period.
Basic CLTV Calculation Project
Within the scope of this project, we will make basic CLTV calculations using customer data and analyze the differences of CLTV according to customer segments.
Step 1: Data Loading and Preparation
We will perform the cleaning operations by loading the data sets. This step is critical to making the data analyzable.
Step 2: Calculating Customer Characteristics
By analyzing customers' shopping habits, we will calculate purchasing frequency, average order value and customer lifetime for each customer.
Step 3: CLTV Calculation
We will calculate CLTV using the obtained customer characteristics. Using a simple CLTV formula, we will estimate the total value customers will provide to the business.
Step 4: Analysis and Visualization
By analyzing the calculated CLTV values, we will examine the differences according to customer segments. These analyzes can be used to optimize marketing strategies.
Data set
The data set includes customers' shopping habits and demographic information:
Customers:
CustomerID: Unique customer ID.
Age: The age of the customer.
Gender: The gender of the customer.
Region: The region where the customer lives.
AcquisitionDate: The date the customer was acquired.
Orders:
OrderID: Unique order ID.
CustomerID: Customer ID.
PurchaseDate: Purchase date.
PurchaseAmount: Purchase amount.
ProductCategory: Category of the purchased product.
CustomerType: The type of customer.
OrderDetails:
OrderID: Order ID.
ProductCategory: Product category.
CustomerType: Customer type.
CustomerAcquisition:
CustomerID: Customer ID.
AcquisitionChannel: The channel through which the customer was acquired.
AcquisitionDate: The date the customer was acquired.
Conclusion
In this blog post, we detailed the concepts of CLTV and CAC and focused on the basic CLTV calculation project. We will make CLTV calculations using customer data and try to optimize marketing strategies by analyzing these values. In the next step, we will start the cleaning processes by loading the dataset and then perform the CLTV calculations.
With this project, we will better understand customer relations and develop strategies to increase customer loyalty. CLTV and CAC analyzes are critical to increasing business success and achieving sustainable growth.
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