What is Customer Lifetime Value (CLV) and How to Calculate it

Customer lifetime value (CLV) represents the total revenue a business can expect to earn from a customer throughout their relationship. In this guide, you’ll learn how to calculate CLV and strategies to improve the same.

Customer lifetime value, also known as CLV or CLTV is the secret to unlocking consistent revenue and growth while driving customer retention and loyalty. Understanding the customer lifetime value formula enables you to turn your one-time buyers into lifelong customers without constantly chasing new leads.

What is Customer Lifetime Value (CLV)?

Customer lifetime value (CLV) is the total anticipated revenue a company foresees from its average customer throughout their entire relationship. It is an estimate of the total value a customer brings to a business.

This metric doesn’t focus on the value of a single transaction. Instead, it considers all the potential transactions that can be made with the customer. Customer lifetime value means considering factors such as customer acquisition costs (CAC), ongoing sales and marketing expenses, operational costs, and production expenses.

Many businesses focus solely on immediate sales—a myopic approach that neglects the potential long-term customer value. While acquiring new customers is necessary for expansion, nurturing existing relationships and maximizing the consumer lifetime value is equally—if not more—important for maintaining a thriving business model.

There are two main types of CLV models.

Historic CLV Models

Also known as traditional customer lifetime value analysis, the historic lifetime value model focuses on past customer behavior to calculate the value already generated. This approach uses actual transactional data and is particularly useful for evaluating existing customer relationships.

Predictive CLV Models

Predictive CLV models conduct lifetime value analysis to forecast future customer value. This type of CLV analysis uses statistical techniques and machine learning algorithms to estimate potential future revenue based on various factors such as purchase history (historical data), customer demographics, customer engagement metrics, average purchase frequency rate, business overheads, and so on. 

The key difference between historic and predictive CLV lies in their temporal focus and application. 

• Historic CLTV provides a retrospective view, while predictive CLV offers forward-looking insights. 
• Businesses use historic CLTV for performance evaluation and customer segmentation, whereas predictive CLTV guides future marketing investments and customer acquisition strategies.

Both types of customer lifetime value analysis are valuable for different purposes. 

A comprehensive customer life time value analysis often combines both approaches to gain a holistic view of long term customer value. This integrated approach allows businesses to not only understand past performance but also make data-driven decisions for future growth and customer retention strategies.

How to Calculate Customer Lifetime Value

Customer lifetime value calculation relies on informed assumptions, such as estimating average sale value, transaction frequency, and customer relationship duration. Established businesses with historical data can calculate CLV more accurately.

CLV Formula

The customer lifetime value formula is:

CLV = (Average Value of Sale) × (Average Number of Transactions) × (Average Customer Lifespan)

Average purchase value multiplied by average purchase frequency is your “customer value.”  So, in essence, the CLV formula is:

CLV = Customer Value × Average Customer Lifespan

If you’re looking for a simple way to calculate CLV for yourself, try our Customer Lifetime Value Calculator.

Customer Lifetime Value Example

To give you a concrete CLV example, let’s create a hypothetical company for calculating customer lifetime value. 

The average sale for the boutique clothing retailer, Bellissi, is $50, and the average customer shops with them three times per year for two years. The customer lifetime value of this customer is calculated as follows:

Customer Value = Average Value of Sale × Average Number of Transactions

= $50 × 3

= $150

Customer Lifetime Value = Customer Value × Average Customer Lifespan

= $150 x 2

= $300

This basic CLV calculation provides a quick estimate but doesn’t account for factors like customer acquisition costs or the time value of money.

Customer Lifetime Value Calculation Considering Important Business Factors

In companies with complex products and business models, the formula for calculating lifetime value of a customer gets complicated. Several factors contribute to the customer LTV formula such as churn rate and brand loyalty. Let’s take a look at these factors in detail. 

Churn Rate

The rate of attrition, or churn rate, differs from business to business, depending on the competitive advantage a business can command. For subscription-based businesses, such as SaaS companies, the customer lifetime value calculation often includes churn rate. 

Churn rate is calculated by:

• Subtracting customers at the end of the period from customers at the beginning of the period.
• Dividing the difference by the number of customers at the beginning of the period.

Churn Rate = (Users at the Beginning of the Period – Users at the End of the Period) x 100 / Users at the Beginning of the Period

Consider this example: if a business started the year with 1,000 loyal customers and ended the year with 750 customers, their churn rate would equal 25%. This means 25% of their customers took their business somewhere else.

Customer Loyalty

We must also consider how a customer perceives the brand in question. If a customer has no dedication to a particular brand, they are considered brand-agnostic. Building a sense of brand loyalty is important for any business as it directly correlates to an increase in customer retention rate and a decrease in churn rate, which in turn, helps increase CLTV. 

Loyal customers will advocate on the company’s behalf. As champions of the brand, they will drive word-of-mouth marketing. Brands with loyal customers are likely to see a higher than normal client lifetime value.

Why is Customer Lifetime Value Important to Your Business?

Understanding consumer lifetime value is essential for businesses across all sectors. Let us deep dive into the reasons and see some examples of customer lifetime value in marketing and SaaS.  

1. Informs Customer Acquisition Strategies

CLV helps businesses determine how much they can afford to spend on acquiring new customers while remaining profitable. This is especially important in the SaaS industry, where customer acquisition costs (CAC) can be high. Lifetime value calculation helps inform their marketing budget and strategies, allowing them to optimize their customer acquisition efforts.

2. Drives Customer Retention Efforts

Understanding CLV helps businesses recognize the importance of customer retention. It’s often more cost-effective to retain existing customers than to acquire new ones, and CLV quantifies this value. 

Consider CLV in this marketing example: A content marketing firm uses CLV to demonstrate the value of their services to clients. They show how their strategies increase the CLV of their clients’ customers, illustrating the value of their services in helping them improve client lifetime value, hence justifying their fees.

3. Guides Product Development and Business Growth

CLV provides valuable insights that can inform product development strategies and overall business growth plans. By understanding which customers can generate the most value over time, companies can tailor their offerings to attract and retain these high-value customers.

Understanding and improving client lifetime value can drive acquisition strategies, enhance retention efforts, and guide overall business growth. By focusing on increasing CLV, businesses can ensure long-term profitability and success.

Tips to Improve Customer Lifetime Value

To increase customer lifetime value, it is important for companies to uplift their customer experience strategy as well as ensure an effective defense against competitor disruption. Businesses that use economies of scale, for example, can attain a much lower price point than the competition.

Most companies, however, do not have this luxury. This means they must implement tactics to improve operational efficiencies and impress customers through targeted, personalized, and relevant communication.

1. Optimize Onboarding

To improve customer lifetime value, it is important to reduce the churn rate. High churn rates after a single interaction underscore the urgent need for companies to make their first impression positive. Customers often need education on the features and benefits of your product to truly understand how the product can positively impact their lives.

In a service business, effective user onboarding can be as simple as demonstrating a dedication to customer service and availability to solve customer problems. Being attentive to the needs of a first-time customer and relieving any hesitations about their decision to purchase should be a top priority for this first interaction.

2. Effective Communication

Keeping an open line of communication with the customer goes a long way in improving customer LTV. In today’s environment, it’s more important than ever to respond to feedback, especially negative comments and poor ratings.

The simple acknowledgment that a company is receptive to feedback and dedicated to addressing customer problems can be a catalyst for repeat business. Increasing the effectiveness of customer communication also applies to sales and marketing copy. You can measure the performance of communication with customers by assessing churn rate and ad conversion rate.

3. Implement Loyalty Program

Implementing a customer loyalty program can be a great way to personalize the customer experience while incentivizing repeat purchases. Some common loyalty programs offer reward points, or the ability to unlock free and discounted products after the accumulation of purchases. 

Customers are proud of the rewards they accrue and companies are rewarded with an increase in client lifetime value. An airline, for example, rewards customers who make purchases using their exclusive credit card with free miles that can contribute to the cost of a flight or accrue to a free flight.  

4. Retarget Customers

One of the most important tactics to increase customer lifetime value is to re-engage customers who have had a previous experience with the brand. Retargeting can be a simple reminder of the company and, at the very least, increase brand recognition.

Infographic

Dive into this infographic for a visual breakdown of what CLV means and how calculating LTV of customer is helpful for businesses. 

Start Implementing Customer Lifetime Value Analysis

Calculating customer lifetime value is crucial for informed business decision-making. While simple CLV formulas provide quick estimates, more complex models offer deeper insights into customer behavior and long-term value. Businesses should choose the CLV calculation method that best fits their needs and data availability.

The goal of any CLV formula or customer lifetime value equation is not just to arrive at a number, but to guide strategies for customer acquisition, retention, and overall business growth. Regular CLV analysis helps businesses focus on creating long-term customer relationships rather than just short-term sales.