Customer Lifetime Value (CLV) is an essential business metric for measuring and improving the customer experience. Businesses use it to understand how valuable a customer is to their company; this is not measured from purchase to purchase, rather, CLV measures the average customer’s value over the entire duration of their relationship with the business. This is helpful for answering questions like:
- Which customers generate the most revenue?
- Which customers are most loyal to your business?
- What campaigns attracted the customers with the highest CLV?
- Which marketing channels yield the highest ROI?
Calculating CLV and understanding how your customers are spending with your brand over time can answer these questions and so many more.
This article will cover everything you need to know about Customer Lifetime Value (CLV) including how to measure it, ways to increase it, examples of CLV, and frequently asked questions.
But first, the basics of Customer Lifetime Value!
What Is Customer Lifetime Value (CLV)?
CLV, is a metric that represents how much money a business can expect a customer to spend on their goods or services during their entire relationship with the company. This is measured in revenue and typically represented as an average dollar amount for a given set of customers.
An often-used variation of CLV is LTV, which also stands for Lifetime Value
For example, a brand can launch a new product and then go back and measure the CLV of the customers who purchased that product. They may look at CLV over 3 months, 6 months, or specific quarters. This can help them estimate CLV to forecast revenue for following product releases.
CLV gives 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.
Why Is Customer Lifetime Value Important?
One of the key advantages to calculating CLV is that it can help you segment your customers in useful ways. For example, you may find it beneficial to segment customers into groups based on specific products they purchased or campaigns they were acquired from and then look for similarities among the members of each group.
But more importantly, measuring Customer Lifetime Value and then segmenting by specific customer traits can help you personalize the customer journey, which is a primary method of how to increase LTV. More on this below!
Measuring and understanding CLV are essential practices for deciding where to allocate your marketing resources or what changes you should make to your next product design or software deployment.
CLV is also an essential metric for identifying loyal customers, which can pay off significantly. In recent years, market research has made it clear that satisfying current customers is usually a better investment than acquiring new ones. 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.
Customer retention is a key piece of the puzzle for driving long-term growth for businesses, and Customer Lifetime Value plays a huge role in measuring and improving retention.
How to Measure Customer Lifetime Value (CLV)
If you’re wondering how to calculate Customer Lifetime Value, you’re not alone. The good news is calculating CLV is not necessarily complex; it’s just about knowing the formula and which inputs you need.
There are several popular approaches business owners take to calculate CLV. One of the most straightforward strategies includes the following steps:
- Average Purchase Value (APV): Divide your total revenue for a specific time period by the total number of purchases made in that period.
- Average Purchase Frequency Rate (APFR): Divide the number of purchases by the number of unique customers who made a purchase in that period.
- Customer Value (CV): Multiply the average purchase value by the average purchase frequency rate.
- Average Customer Lifespan (ACL): Calculate an average of the number of years a customer continues spending money on your goods or services.
To complete one final step, 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.
Things get more complex when businesses want to look at CLV for specific customer segments or want to understand their Lifetime Value per Cohort, for customers acquired in specific months (or other periods of time). That’s where it becomes easier to invest in a business intelligence tool that provides lifetime value as an automatically calculated metric.
Peel can show you customer lifetime value for monthly acquisition groups, which you can segment based on customer tags, discount codes, campaigns, and so much more. It’s all automated if you don’t want to deal with the time sync of extracting your data and doing manual calculations for all these various groups.
Customer Lifetime Value (CLV) Examples
Sometimes it’s best to look at practical examples to better understand CLV. Let’s distill it down to a few high level examples of how different industries might calculate CLV and how those verticals differ in their view of CLV.
In these examples, we’ll be showing customer value (APV x APFR) and average customer lifespan calculated in one step (assuming we have values for each of those).
A local deli is a great start for understanding CLV even if you aren’t an expert in business practices. Generally, delis have a lot of repeat customers who visit them as an easy option for grabbing a quick lunch during the workday.
Let’s say this business owner has just one deli location with an average sale of $10 – sandwich, chips and drink combo. Their average customers are local business people who come by twice a week for lunch, 48 weeks per year, for an average of 6 years.
The deli's average CLV would end up being those figures multiplied out. $10 (average sale) x 96 (yearly visits) x 6 (average number of years) = $2,000
An appliance retailer has much higher ticket products with a much lower purchase frequency compared to many businesses. Let's assume most repeat customers make 2 purchases within 10 years with an average sale price at $800. It’s not every day (or even every couple years) that a washer, dryer, refrigerator or other appliance needs replacing. So this type of business would be measuring CLV over much longer periods for returning customers.
Their CLV would be: $800 (average sale) x .2 (annual purchases) x 10 years (average number of years) = $1,600
Another major business type, especially in ecommerce and SaaS companies, is the subscription model. This is pretty straightforward because when customers are on subscriptions, you know exactly how much they are spending with your company over time. They bring in predictable monthly recurring revenue (MRR), and if they subscriber for a number of years, you know you are getting at least 12 purchases from them each year (on a standard once-a-month subscription).
If an ecommerce brand had an average subscription price of $40 with subscribers staying on for an average of 3 years, here’s their CLV:
CLV = $40 (average sale) x 12 (annual purchases) x 3 years (average number of years) = $1,440
Measuring Customer Lifetime Value of your subscribers gets a whole lot easier when you don’t have to do manual calculations. Especially if you want to look at different acquisition groups (aka cohorts) based on the month where they first purchased or subscribed to your products/services.
How to Increase Customer Lifetime Value
The key to increasing CLV is to capitalize on customer behaviors to create a base of loyal, repeat customers.
In a way, working to increase 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.
Generally, happy customers are those whose needs are met by your products and who are engaged with personalized, timely content.
Here are 5 things you can do right now to increase your customers lifetime value:
Focus on Customer Satisfaction
Focus on a few overarching principles that impact customers’ satisfaction throughout their purchase journeys.
This list, inspired by a recent blog from CRM powerhouse Shopify, 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.
Focus on Customer Loyalty
Creating strong loyalty and rewards programs is one 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. Zoom in on profitable, loyal customers and reward them in unexpected ways—like offering exclusive discounts and special treatment like early access to product releases
Personalize the Customer Journey
Customer behavior data you collect on your customers is one of the most powerful tools you have to drive growth. The more you know about your customers, the more you can tailor their experiences.
Personalizing email & SMS communications and retargeting ads that reach your customers have proven to lead to 25% higher revenue for companies who are doing it right. To do this, you should be asking what can I offer my customers that might add value to their entire experience with my brand?
If you want to retain your customers and have them make frequent purchases, you have to remember that you’re asking a lot from them. That means you should be willing to give them a lot in return. From special offers, to great product recommendations based on what they’ve purchased, to even small gestures like recipes, or guides for how to best use your product.
All of these things are value-added brand experience activations that you should use to deliver at the right time, based on behavioral data. If you can deliver on personalized content and messaging, you’re sure to increase your CLV.
Segmenting customers by Recency, Frequency, and Monetary value is a great way to deliver on personalized content. It’s called RFM analysis, and it’s quickly becoming a fan favorite for ecommerce brands looking to improve retention, drive growth, and increase customer lifetime value.
Upselling & Cross-Selling
Exposing customers to great products on your website, in the check-out process, and in your post-purchase communications is essential for improving CLV.
Upselling is where you expose customers to higher ticket items. But strategy is essential here. You don’t just want to shamelessly plug whatever is most expensive in your product range; this is all about delivering value to both you and your customers. Use post-purchase data to improve the experience.
If customers are checking out with a single item, maybe you make them aware of the multi-pack bundle that gives them more value over time. Or maybe they are repurchasing an item that is more of an introductory product and, given their stage of the buyer’s journey, you think they could benefit from a better performing, or higher-quality version of the product that you offer. Tell them!
Cross-selling is where you expose customers to complementary products based on what they are purchasing. This is a great way of getting customers to include add-ons in their purchases or to come back and grab those essential cross-sells.
Customer Relationship Management & Support
Good support that’s both responsive and accessible for customers is everything. Especially in ecommerce where customers can’t just walk their returns back into your store. Any time a customer has an issue with your brand or products, it’s an opportunity to win over their loyalty by giving them a great experience and solving their issues.
This is all a means of improving CLV of course. The happier your customers are, the most likely they are to return and make subsequent purchases. A simple customer support win can go a long way in converting a customer to a brand champion who purchases often.
Ingesting, organizing, and coordinating all of that information across, sales, marketing, and support is a huge undertaking. That’s why businesses use ERP (enterprise resource planning) and CRM (customer relationship management) software to store customer relationship data and make it accessible for internal teams to better.
Customer Lifetime Value (CLV) Frequently Asked Questions
What is CLV in marketing?
CLV stands for customer lifetime value, which is the measurement of the total value (in revenue) that a customer will bring to a business over the entire relationship with that business. Customer lifetime value helps marketers understand their customer behavior through the predictive lens of how much their customers will spend on average over a given period.
How do you calculate the lifetime value of a customer?
The simplest way is to take your Average Purchase Value (APV) and multiply it by your Average Purchase Frequency Rate (APFR) to get your Customer Value (CV). Once you have your CV, multiply that by your Average Customer Lifespan (ACL).
If you want to do this in one step (assuming you have values for these), the formula for customer lifetime value would be:
CLV = APV x APFR x ACL
What’s the most important action to increase customer lifetime value?
Anything you can do to deliver value for your customers at the right stage of the purchasing journey. If you deliver personalized content that lands at the right time, your customer is more likely to make purchases from you as their loyalty increases and their customer satisfaction improves.
Increase Customer Lifetime Value With Data Insights
Now that you understand customer lifetime value, why CLV is important, how to calculate it, and how to improve it, you’re well equipped to retain more customers and increase your revenue.
To benefit even more from CLV and other key performance metrics, take a deeper dive into customer behavior data. Peel’s ecommerce analytics tool empowers business owners to connect with customers on a whole new level, helping to bolster your revenue. Learn more and try Peel for free today.