What Customer Lifetime Value (CLV) Is & How to Calculate It

What Customer Lifetime Value (CLV) Is & How to Calculate It

I've consulted for hundreds of businesses obsessed with new customer acquisition while completely ignoring the goldmine in their existing customer base.

If you don't know your Customer's Lifetime Value, you're flying blind. You're making decisions based on incomplete data, which is costing you predictable, scalable growth.

The businesses that dominate their industries aren't just focused on getting new customers—they're methodically maximising the value of each relationship over time. They know precisely how much a customer is worth beyond that first transaction.

In the next few minutes, I will show you how to calculate this critical number for your business and, more importantly, how to use it to make decisions that will dramatically increase your profitability without spending a single extra dollar on advertising.

Let's turn your one-time buyers into profit machines that fund your business for years.

What is Customer Lifetime Value?

A company's primary goal is to grow its business. This means increasing the number of customers. To do so, you must have effective ways to keep your existing customers and attract new ones.

Lifetime value gives you an idea of the value of your customers, or in other words, how much they cost you over time. If you can get a client to pay a higher price or generate more sales, you can increase your profit per customer.

By calculating customer lifetime value, you can gain insight into your current profit margins and your competitors' charges.

What Does CLV Look Like?

You can calculate your CLV using your existing customers and their average order sizes. Here's an example of how you would calculate it:

In this case, the resulting calculation would be:

CLV = $10,000 x 300 ÷ 20 = $15,000

Keep in mind that this is an approximation. You may find that your business generates significantly different numbers. For example, if your average customer spends less or makes more purchases in a year, your CLV will look lower than if they spend more.

It's also important to remember that if you have a high churn rate, your CLV will be lower than if you have a low churn rate.

Calculating CLV for Different Business Models

Business models require unique approaches when calculating Customer Lifetime Value (CLV). Subscription-based businesses, for instance, often focus on retention rates and recurring revenue streams.

Analyses of these models spotlight the importance of reducing churn to maximise customer value. E-commerce platforms, by contrast, may prioritise average order size and frequency of purchase. Here, increasing the frequency of customer visits can significantly impact CLV.

Brick-and-mortar stores might focus on in-store experiences and loyalty programmes, as customer interactions tend to be face-to-face. Each model reveals a variety of strategies to optimise CLV and enhance profitability.

Additionally, businesses must consider the life cycle stages of their products or services when calculating CLV. Companies offering long-life products should focus on upselling and cross-selling to enhance customer value, whereas fast-moving consumer goods may rely on volume-based strategies to drive CLV.

These factors highlight the need to tailor calculations to align with specific market conditions and business goals, ensuring strategies are both practical and profitable in their application.

Customer Segmentation in CLV Analysis

Segmenting customers is essential in practical CLV analysis. Customers can be grouped based on spending habits, demographics, or purchasing behaviour.

Segments with high CLV often include repeat purchasers or those who engage with premium products. By understanding these segments, businesses can tailor marketing strategies, offer personalised promotions, and develop loyalty schemes.

Differentiating customer groups allows for targeted efforts, enhancing overall revenue potential. Effective segmentation results in a more strategic approach to maintaining high-value relationships, which is essential for sustaining long-term success.

As your business grows, you'll be able to hire additional employees, which could mean more work and opportunities to sell more products. If your company is smaller, this growth may not be as easy or impossible.

In these cases, you'll have to rely on other strategies, such as attracting more customers.

This is where the concept of customer lifetime value comes in. When calculating the value of your customers, you have to consider their time with your company rather than just their purchase history.

How Can I Increase My CLV?

It's important to understand that CLV is an ongoing challenge for any business. The more time your customers spend with you, the more valuable they become. Your customers will look for alternatives if you don't offer quality service.

So, what can you do to keep your customers?

First, it's vital to ensure your customer support team is trained and prepared for the questions that may arise with your products and services.

It would help if you also tried to understand your client's needs and desires so you can develop personalised solutions that meet their requirements.

As a small business owner, you may be surprised that you can keep more current customers by improving their overall experience with your business.

Try to make your business a pleasant place to spend time and an enjoyable experience for your customers.

Customers are likelier to stick around with a business that makes them feel valued, appreciated, and comfortable. Treating your customers well makes them more likely to recommend you to friends and family.

What does a CLV tell us about a customer?

The CLV is an integral part of any marketing plan. It helps you know whether you are meeting customers' needs or losing them.

When you measure the value of a customer, you are looking at the lifetime value of the relationship, which includes the lifetime value of the product and the lifetime value of the relationship.

Measuring CLV can be tricky because it requires a lot of complex data to calculate. We must track how much customers spend on the product, their lifetime costs, and the product returns. This requires a lot of tracking and more tracking.

With all that complex data, we create a report showing what we calculated as CLV. If the results show that we are losing money on a customer, you know you need to put resources into fixing this situation.

CLV can be helpful for several reasons. First, it allows you to identify customers who are valuable, high performers, and low performers. These customers are the ones who will bring you more profit. By identifying these high performers, you can take more time to build relationships and create stronger bonds with them.

Second, CLV is the best way to compare your product with those of your competitors. Once you identify your high-performance customers, you can use their values to help you determine what products and services your competitors offer that are most similar to yours.

Finally, CLV can be an excellent tool for your personal growth. When you see a customer's value to your business, you'll become more motivated to keep that customer.

As you work to grow your business and build relationships with customers, remember to measure the CLV.

Integration of CLV in Marketing Strategies

Integrating CLV data into marketing strategies can transform customer relations. By identifying high CLV individuals, businesses can focus on retaining these valuable clients through personalised marketing campaigns.

Offering exclusive deals or early access to new products can strengthen these bonds. Marketing efforts to expand high-value customer bases can drive greater returns on investment.

Aligning marketing strategies with CLV insights ensures campaigns are data-driven, leading to enhanced growth and profitability.

Why do some customers seem to be more loyal than others?

Loyalty is the most powerful weapon in your marketing arsenal. It's the cornerstone of successful marketing and the foundation of any profitable business.

Loyal customers are the ones who come back time and time again for more. They are the ones who buy a product or service when it's priced competitively. And they're the ones who tell their friends and colleagues about you, which creates a snowball effect and builds your brand.

So, why are some customers more loyal than others?

The answer is simple: you created loyalty. When you create an experience that is more than just the product or service, you create a customer relationship.

As you continue to serve your customers, you are building a relationship. In a relationship, something is exchanged between the two parties. A relationship is always a two-way street. You must give something in return for the relationship.

If you create a memorable experience, you'll encourage your customers to come back repeatedly. They'll enjoy the experience and want to tell their friends about it.

It would be best to remember that loyalty is a choice, not an obligation. You can create an experience that makes customers feel appreciated and valued and, as a result, become loyal.

What are the different types of CLV?

CLV is calculated using different methods, but all of them involve some form of lifetime value calculation. There are three main types of lifetime value calculations, including the following:

The Average Lifetime Value Method (ALV)

The ALV method uses the average customer lifetime value to determine the value of a single customer. In this case, the average customer lifetime value is the CLV.

This method helps predict the value of a customer. However, the results are not always accurate because the sample size is limited. This is because the sample size is based on the number of customers, which is smaller than the number of customers calculated.

The Net Present Value (NPV) Method

The NPV method determines a customer's lifetime value's net present value. This is the value of a single customer minus the cost of acquiring the customer.

This method allows companies to identify high-value customers that they can acquire. It is a common technique for retailers because they can offer customers free products and discounts to develop them.

The Discounted Cash Flow Method (DCF)

The DCF method calculates the cash flow of a single customer over the customer's life. In this case, the company calculates the present value of the customer's future cash flow.

The company then discounts that value to account for the time it takes to get money from the customer. This is done by calculating the interest rate that would apply to that future value and then discounting it back to the current period.

The company's total earnings over the customer's lifetime are the sum of the discounted future cash flow.

The company would subtract the acquisition cost from the cash flow to calculate the CLV.

Best CLV Metrics for Different Industries

Different industries have different goals when calculating their CLV metrics. Some companies use CLV to identify their existing customers as the most profitable. In contrast, others use it to determine which potential customers are the most valuable.

There are two main reasons why companies use CLV metrics: to improve profitability and to increase sales. When a company looks to improve profitability, it's often looking for ways to increase its margins. If a company can get more money out of each customer, then it will be able to make more money overall.

When looking to increase sales, CLV can provide insight into which customers are more valuable, which can help drive more sales. It's common for companies to target potential customers based on demographics, product preferences, and more.

A CLV calculator is an essential tool for evaluating your business performance. If your company is trying to determine how much each customer is worth, then a CLV calculator is the right tool.

Real-World CLV Calculation Tools

Various tools can assist in calculating CLV accurately. Popular software such as Salesforce and HubSpot provides businesses with integrated features to measure and track customer value effectively.

These platforms offer functionalities to tailor calculations based on specific needs, including customer retention rates and purchase frequency.

Companies can streamline data collection and analysis using these tools, leading to more informed strategic decisions. Adopting the right tool simplifies complex CLV calculations, ensuring precise insights for business planning.

If you want to calculate your CLV, many different types are available. Choose one that best suits your needs, but remember that other tools will produce different results.

You may find that your company is using an older version of a CLV calculator that is no longer suitable for your needs. If you need to find a new one, the best way is to check online. Find companies with a similar business model to yours and see what they use for their CLV. You may be surprised to find a more suitable version of a CLV calculator on a competitor's website!

Challenges in CLV Calculation

Calculating CLV presents several challenges. Inconsistent tracking systems or fragmented data sources often hinder accurate data collection. Changes in consumer behaviour can also affect predictability, making future CLV estimates complex.

Market fluctuations may lead to revised calculations as economic shifts impact customer purchasing power. Overcoming these challenges requires strong data management systems and regular analysis updates.

Businesses must also remain flexible, adjusting models to reflect new consumer trends or economic conditions and ensuring CLV calculations remain relevant and actionable.

Wrapping Up

CLV is a great way to measure the value of your current and future customers. Once you know what you're worth regarding customer lifetime value, you can determine how much to charge per sale.

The main problem with CLV is that it takes time to calculate. But it doesn't have to be a painful process.

We created a spreadsheet that does all your calculations so you can start measuring your value immediately.

To ensure you get the most accurate results, we've included an analysis of every conversion to see which conversions are most valuable.