What is Customer Lifetime Value? How to Calculate CLV

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Ecommerce giant Amazon may do its best to please every customer, but there’s one customer segment it pays extra attention to: Prime members. No, it’s not just because Prime members pay for fast shipping and free returns. It’s because Prime members spend $1,340 annually – more than twice as much as non-Prime members.

Factoring in the average amount of time Prime members stay with Amazon, the customer lifetime value (CLV) of a Prime member is $2,283 compared to $916 for non-Prime members. Knowing this, Amazon can redouble its efforts to retain existing Prime members and convert new customers to Prime.

Do you know the CLV of your audience segments? Reaching the right customers with your marketing strategy can be the difference between continually struggling to drive incremental revenue and ensuring strong, sustainable, reliable organic growth.

What is customer lifetime value (CLV)?

MARKETING
TERM
DEFINITION

Customer Lifetime Value (CLV)

Customer lifetime value (CLV, sometimes called CLTV or LTV) is the total estimated net profit that a business will earn per customer throughout their entire relationship.

It’s important that you don’t use gross margin or total revenue to calculate this metric, or you could inflate the value.

CLV is distinct from other customer-centric metrics like the Net Promoter Score (NPS), which measures customer loyalty, and the Customer Satisfaction Score (CSAT), which measures customer satisfaction. While the other metrics measure intangible benefits, CLV is linked directly to revenue.

The importance of customer lifetime value

Customer lifetime value tells you at a glance which customer segments are worth the most to your business overall. This data informs your new customer acquisition plan and helps you allocate retention resources in order to improve profit margins. This is especially helpful for businesses that have multi-year relationships with current customers, like B2B companies and subscription services. However, the metric is also useful for B2C companies with loyal customers who make regular purchases.

We cover more business performance insights in our post about the most important SEO metrics to measure.

The real worth of a customer

CLV enables a brand to see past the value of the initial transaction. For example, even though an initial transaction for certain SaaS productivity software may be $50,000, the lifetime value may be $250,000 or more. For an apparel retailer, an initial purchase of three shirts might produce a negative marketing ROI after acquisition costs. However, that same customer may actually be worth $1,637 in revenue over the three years they purchase from the brand.

CLV helps your brand to allocate budget wisely

Sorting customers, leads, and prospects by their customer lifetime value lets businesses funnel the customer acquisition budget wisely by targeting the audience segments and personas that are most likely to turn into the highest-value customers. Among the many customers a brand may acquire, CLV then helps guide a company into appropriately allocating resources into maintaining relationships with the most high-value customers.

Customer lifetime value helps identify weak spots in revenue generation

The customer lifetime value metric can also help you spot weak points in the customer journey that increase churn rate.

For example, a copywriting service might notice that customers tend to leave after one year. Maybe they discover that their customers make copywriting decisions on an annual basis. If so, they could proactively help customers review their content performance and future needs.

An apparel retailer may learn that customers are eager for something new after wearing their clothes for three years. They could reach out at that point with suggestions for clothing options that deviate from their typical selections in order to update their wardrobe.

How to calculate customer lifetime value

To calculate your lifetime value per customer, do this first:

• Calculate your brand’s average customer lifespan.
• Determine the total number of purchases during the customer lifespan.
• Calculate your brand’s average order value.

Then, multiply the average order value by the total number of expected purchases within the typical customer lifespan. This is what your customer lifetime value formula will look like:

{Avg order value} X {total number of purchases during customer lifespan}

Or, if your customers pay you monthly (for example: insurance, phone service, or business software) your CLV formula might look like this:

{monthly customer revenue} X {average customer lifespan in months}

Your business’s average CLV is an important metric to track because it helps you set KPIs based on overall performance. As a result, you can focus on the broad goal of raising your average customer lifetime value.

Furthermore, you can calculate CLV on individual customers and segments. Comparing your average customer lifetime value across segments can show you which customers to focus your resources on.

Some marketers also prefer to subtract their customer acquisition cost (CAC) from their lifetime value. That can help you control for the times when a target with a high CLV also has a high CAC. Only the final score will tell you whether the customer is worth pursuing.

Customer lifetime value calculator

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Customer lifetime value examples

Let’s say you sell subscription-based design software, similar to Adobe or Sketch. We’ll use the above customer lifetime value calculation for two of your target personas.

Customer A

Customer A is a freelancer who initially subscribes to your full suite of design tools for $100 a month. After six months they decide they really need only two of the tools, so they subscribe to the standalone tools for $50 a month in total. One year later, they quit freelancing and get hired by an agency that already subscribes to every tool they could ever need. At that point, they cancel their subscription.

• Customer A’s lifespan: one year
• Average order value: $75 (6 months at $100/month + 6 months at $50/month, divided by 12 months total)
• Purchase frequency rate: 12 (for this example we’ll measure the number of purchases per year, but you may instead decide to calculate the frequency rate by the week, month, quarter, or lifetime, depending on your business).

Customer A’s Lifetime Value equation = (1 x 75) x 12 = $900

Customer B

Another persona is Customer B, an ecommerce retailer with an in-house design team. They purchase the full software suite for $100/month and let their subscription auto-renew every year for the next seven years.

• Customer B’s lifespan: 5 years
• Average order value: $100
• Purchase frequency rate: 12

Customer B’s lifetime value equation = (5 x 100) x 12 = $6,000

Comparing Customer A and B

It would be hard not to conclude these numbers that businesses are a more valuable target for the brand to pursue than freelancers. That very well may be true, or the CAC for businesses may throw a wrench into the calculations. 

Let’s say that the freelancers cost pennies to acquire. You’re an active member in their community and you’re well-known among designers for providing the best software available. In fact, you don’t have to actively pursue your freelancers much at all; they come to you when they need design software.

Just hold their interest until they’re ready to make that decision by staying influential in their community. Averaging out your content, SEO, PR, and advertising budget across the millions of freelancers you serve, your CAC for Customer A could be as low as $1.

Customer B is different. It takes time, money, and proper lead nurturing to pursue a business. You many need to interface with several employees across a longer span of time. In many cases, you may not be able to reach the decision-makers directly in the first place. If you factor in the cost of the time spent pursuing these leads, your CAC for Customer B is $5,000.

Subtracting each CAC from our earlier calculations, we get the following numbers:

• Customer A: $900 – $1 = $899 CLV
• Customer B: $6,000 – $5,000 = $1000 CLV

Now things look a little more even, with businesses continuing to have a slight edge over freelancers as your more valuable customers.

Other factors to consider

You might decide to let the numbers speak for themselves and channel more of your resources to the pursuit of business clients.

Or you might reconsider when you think of the intangible benefits of pursuing the design community (including freelancers) first and foremost. Namely, design enthusiasts are your trojan horse into business accounts, requesting and advocating for your product at work. These are the individuals who ultimately deliver the $6,000 per account CLV that you are after.

This consideration may not have been on the table had the CACs not somewhat equalized your two customer lifetime values.

Improving customer lifetime value

Leverage SEO

According to a new commissioned study by Forrester Consulting, marketers often find that customers sourced through SEO are more loyal and engaged. They interact more with content, spend more time on your website, and they tend to be stickier. Although the conversion funnel is longer than paid, ultimately SEO leads to greater customer lifetime value (CLV).

Identify your ideal customer personas

Who are your ideal audience segments and how do you create buyer personas? Although your marketing team may have this well defined, have you checked them against the actual customer lifetime value numbers?

For many brands, there’s a misconception that an easy sale means a great customer. That’s not always the case.

For example, you may have a lower CAC for converting high school girls into new customers for your apparel brand and view that audience segment as low-hanging fruit for new sales. However, it may be that female college students, although requiring a higher CAC, have an average purchase price far higher than the high schoolers. On top of that, they might make repeat purchases and/or show greater brand loyalty.

Don’t only look at new sales and completely ignore existing customer behavior. Be sure to cross reference all of your customer data in order to determine customer lifetime value for each segment and persona. Then, once you’ve identified your best segments and customer persona examples from a CLV basis, explore ways of diverting marketing costs from the lower CLV groups to your more valuable audiences.

Invest in the high performers, not the low ones. Although this may not maximize the next quarter’s financial performance, it will help to maximize your total revenue over the long term.

Become customer obsessed

Beyond just targeting personas, become absolutely obsessed with your ideal customer. Who are they? What thrills them and what doesn’t? What are their top challenges and frustrations?

Are there things you should be doing to keep them as a customer longer?

How can you keep them just as happy in Year 2, Year 3, and beyond, as in Year 1?

In “The Customer Obsessed Enterprise”, Forrester Research points out that customer-obsessed firms “enjoy higher revenue growth, customer satisfaction, and employee satisfaction — and will prevail as the age of the customer intensifies”. Forrester argues that brands need to shift from a company-centric approach of brand management to a culture centered on customer-obsession in order to deliver superior experiences.

The companies that will achieve the highest customer lifetime value moving forward are those that make customer obsession a top priority.

Give your best customers the VIP treatment

Nurture relationships with the individuals and groups that have a high CLV through targeted marketing and special treatment that recognize their VIP status. Ideas include:

• Offer your VIPs early access to products 
• Enable them to shape and influence future products
• Provide white glove customer support, offering personalized onboarding and ongoing help
• Invite them to an exclusive VIP group
• Give them expedited shipping 
• Provide a standard VIP discount
• Etc.

Improve the onboarding process

One of the most critical steps in building a strong CLV comes AFTER the sale. Whether or not customers stick with your brand over the long term largely rests on how quickly and smoothly they start seeing ROI.

With this in mind, make sure you have a stellar customer onboarding process. 

There’s a common situation that hits software companies in particular, but it impacts many other complex businesses. It looks like this:

• The customer knows they need your solution, so they sign up for a subscription. 
• The first time they log in, the interface isn’t what they’re used to. They click around for a few minutes and leave. 
• They tell themselves they need to carve out some time to sit down and really learn the product.
• A month slips by and they never find the time. They cancel their subscription. Or, they use the product as they understand it, but don’t take advantage of the key features that make the product most helpful. After a couple of months, they decide it’s just not worth it and cancel. 
• If colleagues and friends ask for related product recommendations later, they’ll share that they didn’t like the product.

The result? A low CLV customer and active brand detractor, all because of a neglected learning curve with your product or service.

Don’t let this happen! Give your new customers everything they need to have a stellar experience to get the most out of the product or service.

Deepen customer service, support, and experience

Customer service, support, and experience matter!

When you invest in better customer service and support, you’ll do great things for your CLV, as well as your business. Make sure someone is available to help solve customer pain points at every touch point where they might reach out to you: email, live chat, SMS, social media, and phone.

Integrate your support systems via CRM so you develop a history with your customers. As a result, you won’t force them to repeat the same questions to 20 different people. If they’re a VIP customer, offer them a dedicated account manager or a special VIP number to call.

Increase customer satisfaction

At the beginning of this post, we mentioned that CLV is different from other customer-focused metrics like NPS (Net Promoter Score). The former is revenue-focused and the latter, which measures customer satisfaction, is not. But because happy customers spend more, a metric like NPS influences your overall customer lifetime value. When the NPS increases or decreases, the CLV will follow suit.

Outside of spending your marketing budget wisely, there’s one sure-fire thing you can do if you want to improve your CLV. Go back to the root and focus on raising your NPS instead. This is the same thing as increasing customer satisfaction, but the NPS gives you an objective way to approach an intangible concept. It also provides you with a stream of constant, measurable feedback from your customers. 

Invest in digital customer experience

In addition, 62% of customers say they share their bad experiences with others (72% share their positive experiences). How you treat your customers gets amplified, whether you like it or not, impacting your brand’s potential future sales.

The customer experience includes every possible touch point between a customer and your business. This may include website, online chat, social media, email, in-store visits, phone, checkout process, onboarding, product use, customer support. And, since the pandemic accelerated online activity, it’s even more important to have a strong digital customer experience strategy.

The experience across each touch point should be as strong and cohesive as possible. Maintain brand consistency throughout, and provide the exact information your customer needs at every stage in their journey.

Monitor the most important customer experience metrics with the tools that fit each touch point:

• Use social listening tools to track brand mentions. 
• Pay attention to your email open rates. 
• Track the user experience on your website. 
• Offer surveys after every support experience.

Listen, learn, and make changes accordingly.

Leverage Voice of the Customer (VoC)

You can never have too much customer feedback, as long as you don’t bombard them with requests.

Of course should regularly monitor your online reviews and track brand sentiment on social media. But, also seek direct information from surveys and actual customer conversations. This qualitative data tells you why people feel the way they feel.

This post explains everything you need know about collecting Voice of the Customer data.

Again, pay special attention to your VIP customers. Nurture those relationships and ask them if they’d be open to a 30 minute interview about their experience with your brand.

• What made them choose your brand?
• Why do they like the product (or service)?
• What do they not like about the product (or service)?
• What have been their favorite experiences with the brand?
• Would they be willing to recommend the brand to others? If not, why?

Pay special attention to your unhappy customers, too. What soured their experience? Where can you improve? What would change their mind? Use this feedback to improve your product or the customer touch point where the breakdown occurred, and aim to close the loop with your unhappy customers whenever possible. Thank them for their feedback. Tell them how you’re going to improve, and offer refunds when appropriate.

There are magical occasions when respectful customer support can turn an unhappy customer into your biggest ally. When that can’t happen, aim for a neutral relationship. Some customers simply can’t be won over – but you can at least head off public complaints and negativity by diffusing the situation at its core.

Focus on customer retention

It’s widely said that, on average, it costs five times more to acquire a new customer than to retain an existing one. No matter which way you slice it, you need to retain, retain, retain. 

A byproduct of running your CLV calculations is that you’ll start to notice “danger zones”. These are places in the ongoing customer relationship where it’s common for customers to leave. Identify the specific triggers for each audience persona.

• How can you avert the triggers?
• How can you improve that part of the journey?
• Does the customer need more information or training?
• Do you need to add new features to your product or service?
• Do you need to revamp your customer support?

The more you boost your customer retention rate, the higher your customer lifetime value. The higher your CLV, the higher your revenue. And the more you’ll be serving people who love your brand and are out there converting others for you.

Customer Lifetime Value FAQs