Data Analytics

How to Calculate Customer Lifetime Value (CLV)

Do you know which customers are the most loyal to your business? How about which customers generate the most revenue? Your customer lifetime value (CLV) metric can give you insight into these topics, among many others, which can help you make the right moves to improve customer loyalty and retention.

Once you’re up to speed on understanding customer lifetime value and why it's such a critical ecommerce metric, you’ll be able to use CLV data to make better decisions about your sales and marketing investments.

Let's walk through the basics of customer lifetime value, what it is, why it's important, and strategies for leveraging your CLV data. Here's a quick breakdown of what we're covering:

  • What is Customer Lifetime Value (CLV)?
  • Why is CLV Important?
  • How to Calculate CLV
  • How to Improve CLV
  • Improving CLV with Data Insights
Automated Customer Lifetime Value CLV (CLTV) enterprise software

What Is Customer Lifetime Value?

Customer Lifetime Value is a metric that represents how much money a business can expect a customer to spend on goods or services throughout the duration of their relationship with the business. Sometimes referred to as LTV for "lifetime value" or CLTV (simply another variation of customer lifetime value), CLV is often the key that unlocks truly useful business insights.

For example, a gym owner may expect that members who have renewed their membership multiple times are likely to renew again. Depending on factors like members’ ages, the owner can estimate CLV to forecast revenue for the coming years.

CLV can give you big-picture insights into your customer relationships, allowing you to see which relationships are worth nurturing. Customers with low CLV may not be worth as much time or financial investment, while loyal customers may represent significant potential profit.

In our gym example, the owner may want to get customer feedback to inform business decisions for the gym. From new exercise equipment to new classes or maybe even new subscription structures, it's important for this type of business owner to find the right value propositions that strike a positive chord with their most loyal customers.

The same applies for your ecommerce website. It's all about leaning into the content, offers, and value-added goods and services that your customers care about. Digging into your CLV data can help you devise new strategies for improving the way your customers engage with your business and ultimately convert more sales.

Why Is Customer Lifetime Value Important to Your Business?

One of the most significant advantages of calculating CLV is that this information can help you segment your customers in useful ways. For example, you may find it beneficial to segment customers into groups based on profitability and then look for similarities among the members of each group.

These customer similarities can include actions like:

  • Purchase frequency in relation to season
  • Disparate items that are frequently purchased together
  • Discount code usage and frequency
  • Conversions through direct email campaigns
  • Revenue driven through organic vs paid social

These are just a few examples of virtually limitless customer segmentation based on what is relevant to your ecommerce site. This valuable information can help you decide where to spend your marketing resources. It can also help you determine changes you should make to your next product design or software deployment.

Identifying loyal customers can pay off significantly. Over the past several years, market research has made it clear that satisfying current customers is usually a better investment than acquiring new ones. Customer acquisition cost (CAC) can be difficult to keep down with many different companies competing on the same channels to reach similar target audiences.

Successful new customer acquisition can often boil down to who has the advertising budget, which is not always indicative of the best messaging or most useful value props. This drives CAC upward as you are competing with others in your space. According to marketing guru Neil Patel, it costs five times as much to acquire a new customer than it does to retain an existing one.

Spending your marketing dollars on areas that resonate with your loyal customers will help you drive down your churn rate. Catering to your existing customer base to drive better customer retention is a strategy that will pay dividends in both short term and long term marketing strategies. When you've put that much time and resources into carefully crafting your customer journey, why not put more emphasis on delighting the customers who have already become fans of your product? Your customer retention rate will thank you.  

How to Calculate Customer Lifetime Value

You may feel a bit overwhelmed when you consider how many steps are involved with calculating CLV, but don’t worry. If you take it one step at a time, you’ll have no problem.

There are several popular approaches business owners take to calculate CLV. One of the most straightforward strategies includes the following steps:

  1. Average Purchase Value (APV): Divide your total revenue for a specific time period by the total number of purchases made in that period.
How to Calculate Average Purchase Value

  1. Average Purchase Frequency Rate (APFR): Divide the number of purchases by the number of unique customers who made a purchase in that period.
How to Calculate Average Purchase Frequency Rate (APFR)

  1. Customer Value (CV): Multiply the average purchase value by the average purchase frequency rate.
How to Calculate Customer Value (CV)

  1. Average Customer Lifespan (ACL): Calculate an average of the number of years a customer continues spending money on your goods or services.  
How to Calculate Average Customer Lifespan (ACL)

To complete one final step for CLV calculation, multiply customer value by average customer lifespan. This figure represents the revenue you can reasonably expect the average customer to generate for your business throughout their relationship with you.

Expressed as a formula: CLV = customer value X average customer lifespan.

How to Improve Customer Lifetime Value

As you’ve probably figured out, the key to increasing CLV is to capitalize on customer behaviors to create a base of loyal customers. Crafting a positive customer experience, from their first touch with your content all the way through checkout, is critical to improving the lifetime value of a customer.

In a way, working to improve CLV is an exercise in getting back to the basics—it’s Marketing 101. Happy customers are paying customers. Your job is to figure out how to make your customers happy.  As a result, you should experience an improved retention rate and improved customer repurchase rate.

Focus on Customer Satisfaction

Business owners work to improve customer satisfaction in countless ways. Try not to get too overwhelmed by the possibilities. Focus on a few overarching principles that impact customers’ satisfaction throughout their purchase journeys.

This list, inspired by a recent blog post by the customer relationship management (CRM) powerhouse Salesforce, is a good place to start:

  • Invite customer feedback and take it to heart.
  • Be proactive instead of reactive when there’s a problem.
  • Be honest and straightforward with your customers and staff.
  • Work to understand your customers—business intelligence tools can help.

Tons of ecommerce businesses make the critical mistake of only thinking of their customer journey ahead of their transaction. All of the thought and effort is in the attribution channels and touchpoints that serve as funnels into their site. From social media, to email campaigns, to paid ads and more, these channels are critically important paths for you to upsell existing customers and drive in new customers.

But what about after the transaction? As many of the items on Salesforce's list suggest, providing excellent post-purchase customer support is massive for building customer loyalty and driving your customer retention rate upward. People respond to great products and great customer support; when you can make the two intersect, you have a recipe for better profit margins and overall success.

Focus on Customer Loyalty

Creating strong loyalty and rewards programs are some of the most impactful ways to build customer loyalty. More than 70 percent of recently polled consumers cited loyalty programs as a meaningful part of their brand relationships.

Beyond structured loyalty programs, you can foster customer loyalty more subtly by leveraging customer behavior data. Zero in on profitable, loyal customers and reward them in unexpected ways—like offering exclusive discounts and special treatment like shorter checkout lines.

Against the grain of surface level logic, running special promotions for your most loyal customers can actually boost sales. Though your profit margin per item slims down, special promotions increase urgency for your customers. This leads to more items added to their carts and can actually boost their average order value when customers feel the amount of money they spend goes a longer way.

When you focus on customer loyalty as a means of customer retention, you end up building brand loyalty, which is an invaluable trait to have among your clientele. When customers become true fans and promoters of your brand, they often share your products across social media.

Improve Customer Lifetime Value With Data Insights

Now that you understand CLV's importance, how to calculate it, and how to improve it, you’re sure to be rewarded with increased revenue better, customer retention, and heightened brand loyalty.

To benefit even more from CLV and other key performance metrics, take a deeper dive into customer behavior data. Peel’s Shopify analytics tool empowers business owners to connect with customers on a whole new level, helping to bolster your bottom line in many ways. Learn more and try Peel for free today.