What is Customer Lifetime Value? How to Calculate it [With Formula]

What is the customer lifetime value (CLV)? It measures the total revenue your business earns from a single customer. Measuring the lifetime value of a customer is a great way to maximize business growth and profitability. 

Customer lifetime value calculation is also easy. You can improve your customers’ CLV by encouraging them to repeat purchases and stay loyal to your brand. How do you do that? 

Keep reading to find out! 

We’ll teach you everything from the customer lifetime value definition to the customer lifetime formula and how to calculate customer lifetime value. 

Why CLV Matters in Business

Most businesses focus on short-term gains. They prioritize getting new customers early and improving sales today. These things are important of course, but you don’t want them at the expense of your long-term sustainability. 

The best way to think beyond this is the customer lifetime value (CLV). CLV provides your business a paradigm for thinking beyond a single transaction. Using CLV you can think of your customer’s value over time. 

Once you shift to CLV, your business will achieve the following: 

1. Improve Customer Loyalty

Satisfied customers are more likely to repeat purchases and refer others to your business.

2. Optimize Marketing Strategy

Use CLV to tailor your market efforts. That way you’ll better allocate resources to marketing and receive a better ROI.

3. Improve Product Offerings

Use CLV data to make informed product development and improvement decisions. That way you’ll better align with customer’s preferences.

4. Increase Profitability

CLV-oriented businesses better manage costs and efficiently allocate resources. So you’ll improve profitability long-term. 

How to calculate the lifetime value of a customer? Use the customer lifetime value model we’ve provided below. 

Calculating Customer Lifetime Value

You can calculate CLV with the following customer lifetime value calculator formula: 

CLV= (Average Purchase Value x Purchase Frequency x Customer lifespan) – Customer Acquisition Cost

A customer lifetime value example is the following: 

Say you own a restaurant where the average customer spends $20 monthly for 5 years, and it costs you $5 to acquire a customer. 

Your average purchase value is $20. 

Your purchase frequency is 12 since it’s one restaurant visit a month. 

Your customer lifespan is 5 years. 

So your CLV becomes = (20 x 12 x 5) – 5= $1195. 

What three components are taken into consideration when calculating customer lifetime value? 

1. Average Purchase Value: The average amount a customer spends on a single transaction.
   
   You have to track this figure accurately since it impacts your CLV.
   
   Formula: APV= Total revenue / Number of Orders
   
2. Purchase Frequency: How often a customer repeats decisions within a stated time frame. 

You need to accurately analyze your customer’s behavior and purchase patterns to accurately determine purchase frequency.

Formula: PF=Number of Purchases / Number of Customers

3. Customer Lifespan: The average time a customer engages with your business.
   
   You’ll use this to identify when and why customers leave. You’ll also use it to identify strategies to improve customer lifespan.
   
   Formula: CL=Sum of Customer Lifespans/ Number of Customers

4. Customer Acquisition Cost (CAC): The cost of acquiring a new customer.
   
   You have to compare your CAC with CLV to ensure your business benefits from new customers. CAC includes your marketing and sales expenses.
   
   Formula: Customer Acquisition Cost = sales and marketing costs/number of new customers

This is the customer lifetime value equation in action: 

Say you have an average of $3,000 annually per customer who stick for 2 years. You’ll multiply $3,000 by 2 to get $6,000. You’ll then subtract your $1,000 CAC to get a $5,000 CLV

A CLV-based approach also helps you assess your customer experience. You can upsell, cross-sell, and build loyalty programs for sustainable growth.  

Importance of Customer Retention

Customer retention is important for CLV. High customer retention improves your CLV because loyal customers repeat purchases.

You can improve your customer retention through these strategies:

1. Excellent customer service: Providing excellent customer service gives your customer more reason to return. 

2. Personalized experiences: Providing tailored content engages your customers better. 

3. Loyalty programs: Rewarding customers encourages repeat purchases. 

4. Quality products and services: Delivering high-quality products ensures customers return. 

Strategies to Increase CLV

How to improve customer lifetime value? Use these strategies.

1. Cross-Selling and Upselling Techniques

You can cross-sell by providing complementary products and services based on current purchases. You can also upsell by encouraging customers to upgrade to better goods and services. 

Both strategies increase your average transaction value and CLV. They do so for many of your favorite brands. 

For example, McDonald’s and Amazon both use upsell and cross-sell strategies effectively. McDonald’s provides small add-ons, like apple pies, to improve CLV. And Amazon offers you related products when you make purchases. 

2. Exceptional Customer Service and Personalized Experiences

You can create emotional connections and increase their loyalty by providing good customer service and personalized experiences. Good customer service is the best way to improve your brand. Why? 

Because you add value to your customers when you provide refund policies. Good refund policies mean your brand values quality above sales volume. When you achieve this, your business increases CLV. 

3. Subscription Models

A subscription model is the best way to achieve a consistent revenue stream. This increases your customer lifespans. Providing subscription services improves your CLV by creating a recurring revenue stream. 

Following a subscription-based model lets you increase your average order by encouraging an annual billing cycle. You also build long-term customer relationships this way. 

Balancing Acquisition Cost and CLV

Customer Acquisition Cost (CAC) is how much it costs your business to get a new customer. These costs include the marketing and sales costs. You have to maintain an appropriate CAC to avoid overspending. 

You have to balance between CAC and CLV to make your business sustainable. A high customer acquisition cost vs lifetime value ratio means you have a healthy ROI. Conversely, a low CLV-to-CAC ratio means you have an inefficient customer acquisition strategy.  

Your business should continually refine its marketing and sales strategy to improve this ratio. 

Data Analytics and CLV Enhancement

Data analytics provides your business with actionable insights. Here’s how. 

1. Personalization: 

Use data analytics to track and analyze customer behavior and interactions. You can use this data to create personalized experiences for customers. For example, you can tailor product recommendations, marketing messages, and pricing strategies. 

This type of personalization improves customer satisfaction, which increases the chances of repeat purchases. Hence you’ll improve your CLV. 

2. Behavioral Insights: 

You can identify patterns in your customers’ behavior by tracking their data. This pattern can include things like purchase frequency and product preferences. 

You can use this data to make informed inventory management decisions and optimize marketing decisions. This way you’ll improve your CLV. 

3. Churn Prediction: 

You can predict customer churn with data analytics. Doing so lets your business proactively develop strategies to retain customers. Use data analytics to preemptively identify signs of disengagement. That way you’ll improve your CLV. 

4. Optimizing Marketing Efforts: 

Analyzing customer data helps your business optimize your marketing. Use data analytics to focus on customer segments with better potential CLVs to improve ROI. 

Overall data analytics is the best way to improve your CLV. Use data to better understand your customers’ needs, and devise strategies accordingly. You can increase customer loyalty and achieve long-term profitability by optimizing for customer behavior. 

Case Studies

These real-world examples illustrate how CLV improved different industries. 

1. Amazon
Amazon provides personalized recommendations and a seamless shopping experience. This way they’ve created a loyal customer base with a high CLV. 

2. Netflix
Nextflix engages its customers through its subscription-based model and tailored content recommendations. These efforts maximize their CLV and ensure long-term profitability.

3. Starbucks
Starbucks has a loyalty program that provides customers with free drinks. Doing so encourages repeat visits and spending per customer. 

4. Apple
Apple improves its CLV by creating products that seamlessly work together. This encourages customers to remain in the Apple ecosystem. The result is increased repeat purchases, which improves CLV. 

These examples prove your different industries benefit from CLV-based strategies to increase growth and build customer loyalty.

Start Building Brand’s Customer Loyalty

Customer Lifetime Value (CLV) is a long-term metric that gives insights into your customers’ value. Customer lifetime value models let you improve customer loyalty, optimize marketing, and increase profits. 

You can improve your CLV by providing good customer service, personalizing your marketing, and creating loyalty programs. You can also cross-sell, upsell, and follow a subscription model. 

Lastly, you can use data analytics to better understand your customers and improve your business.