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Customer Lifetime Value

What is Customer Lifetime Value (CLV)?

CLTV meaning: Customer lifetime value (CLV), often abbreviated to CLTV or LTV, is a prediction of the total profit a business can expect to make from a single customer throughout their entire relationship with the company.

CLV is a key business metric that helps you understand the long-term value a customer brings. It can be used to segment customers into high-, medium-, and low-value groups, for example. It’s also helpful for informing decisions about customer acquisition, retention, and development.

Why is Customer Lifetime Value Important to a Business?

Now that we’ve defined customer lifetime value, let’s break down why it’s important.

Understanding customer acquisition cost (CAC): By comparing your CLV to your CAC, you can determine if your customer acquisition strategies are cost-effective. If your CAC exceeds your CLV, you’re losing money on each new customer.
Improving marketing through segmentation: Segmenting customers based on their CLV can help you target your marketing efforts. High-value customers might get personalized offers or loyalty programs, while lower-value customers might receive different messaging.
Boosting customer retention: Retaining existing customers is often cheaper than acquiring new ones. Predicting customer lifetime value helps you identify which customers are worth investing in to keep them loyal.
Forecasting revenue: Lifetime value prediction enables you to estimate future revenue based on your current customer base, which is crucial for financial planning.
Identifying profitable products/services: Analyzing the CLV of customers who purchase specific products or services can help you identify your most profitable offerings.

By focusing on maximizing CLV, you can build lasting and profitable relationships — which helps you improve your sales funnel and enhance business performance.

How to Calculate Customer Lifetime Value

Calculating customer lifetime value might seem daunting, but it doesn't have to be. There are several approaches, each varying in complexity. Below is a breakdown of two common methods.

1. The simple customer lifetime value formula

This is the most basic formula and provides a rough estimate:

CLV = Average Purchase Value × Average Purchase Frequency × Average Customer Lifespan

Average purchase value: The average amount a customer spends per transaction. Calculate it by dividing your total revenue by the number of purchases over a period.
Average purchase frequency: How often a customer makes a purchase within a given period. Divide the total number of purchases by the number of unique customers over that period.
Average customer lifespan: The average length of time a customer remains a customer. This can be challenging to determine accurately, especially for new businesses.

Customer lifetime value example: The average purchase value at a clothing store is $50. Customers purchase, on average, four times a year and have a customer lifespan of three years.

CLV = $50 × 4 × 3 = $600

2. The traditional customer lifetime value formula

This formula is more complex but often provides a more accurate CLV:

CLV = Average Gross Margin per Customer Lifespan × (Retention Rate / (1 + Discount Rate - Retention Rate))

Average gross margin per customer lifespan: The average profit you make per customer over their lifetime. This considers your revenue minus the cost of goods sold (COGS).
Retention rate: The percentage of customers who continue to do business with you over a period.
Discount rate: A percentage that accounts for the time value of money (the idea that money today is worth more than the same amount in the future).

This formula is more complicated and requires a deeper understanding of financial concepts. If you’re unsure how to apply it accurately, consult with a financial expert.

Which formula should you use?

The simple formula is a good starting point, especially for businesses with limited data. As you gather more information and your business matures, the traditional formula might offer a more precise lifetime value of a customer.

Remember, calculating CLV isn’t a one-time activity. Your customer value analysis should be ongoing! Reevaluate your CLV regularly as your business grows and your customer base evolves.

Customer Lifetime Value and Your CRM

You can use your customer relationship management (CRM) system to track your sales performance metrics and gather the data needed to calculate your CLV. If your data gathering and analysis process needs fine-tuning, implementing a lead management process can help.

Once you know your CLV, you can incorporate it into your CRM dashboards as a key performance indicator — your customer lifetime value KPI.

For example, tracking changes in CLV over time can indicate whether your customer relationships are becoming more or less valuable. This is essential for understanding your business’s long-term health and profitability.

If your CRM doesn’t give you a 360-degree customer view — a compilation of customer data from several touchpoints — you might consider switching to one that does, such as Fireberry. This will allow you to capture all of your customer interactions, regardless of channel, and give you a more accurate picture of your CLV.

Tip: If your CRm doesn't give you 360-degree customer view— a compilation of customer data from several touchpoints — you might consider switching to one that does, such as Fireberry. This will allow you to capture all of your customer interactions, regardless of channel, and give you a more accurate picture of your CLV.

How to Increase Customer Lifetime Value

Below are nine strategies to boost your CLV and help your business grow.

Enhance customer experience: Delighted customers are more likely to stick around and spend more. So, focus on providing exceptional customer service, addressing concerns promptly, and exceeding expectations.
Personalization: Tailor your marketing messages and offers based on customer preferences and purchase history. This makes customers feel valued and understood, increasing engagement and loyalty.
Loyalty programs: Reward repeat customers with exclusive discounts, early access to sales, or special perks. Loyalty programs foster a sense of belonging and incentivize continued engagement.
Upselling and cross-selling: Offer complementary products or services to existing customers. This increases their average purchase value and strengthens their connection to your brand.
Customer feedback: Actively seek and act on customer feedback. This shows you value their opinions and are committed to improving.
Community building: Create a sense of community around your brand through social media groups, forums, or events. When customers feel connected to your brand and each other, their loyalty deepens.
Win-back campaigns: Don’t give up on customers who have churned. Targeted win-back campaigns with personalized offers can re-engage them. For example, a clothing retailer might send a discount code for a specific item or category of clothing that a former customer previously browsed or purchased, along with recommendations for similar products.
Subscription models: Consider subscription models if they work for the products or services you offer. These create a recurring revenue stream and encourage long-term customer commitment.
Excellent onboarding: Make sure new customers have a seamless and positive onboarding experience. This sets the stage for a strong, lasting relationship. (The onboarding phase is especially important if your business relies on high-touch customer relationships!)

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