Customer lifetime value (CLV) is a metric that measures how much revenue a customer is expected to generate for a business over the entire course of their relationship. CLV takes into account factors such as average purchase value, customer churn rate, and customer retention rate.

Businesses can use CLV to:

Identify their most valuable customers
Segment their customers based on their value
Develop strategies to increase customer retention
Optimize their marketing spend
Make informed decisions about product development and pricing

There are a number of ways to calculate CLV, but the most common formula is:

CLV = Average Purchase Value * Customer Retention Rate * Average Customer Lifespan

For example, let’s say a business has an average purchase value of $50, a customer retention rate of 60%, and an average customer lifespan of 10 years. The business’s CLV would be:

CLV = $50 * 60% * 10 years = $3,000

This means that the business can expect to generate an average of $3,000 in revenue from each customer over the course of their relationship.

CLV is an important metric for businesses to track because it can help them to make more informed decisions about their customer relationships. By understanding how much each customer is worth to the business, businesses can develop strategies to increase customer retention and optimize their marketing spend.

Here are some tips for increasing customer lifetime value:

Offer loyalty programs and rewards to encourage repeat purchases
Provide excellent customer service
Make it easy for customers to do business with you
Offer products and services that meet the needs of your customers
Personalize your marketing and sales efforts

By following these tips, businesses can increase customer lifetime value and generate more revenue from their customer relationships.

Table of Contents

1. Why is Customer Lifetime Value Important?

2. How to Calculate Customer Lifetime Value

3. Customer Lifetime Value Case Studies

4. Advantages of Customer Lifetime Value

Why is Customer Lifetime Value Important?

Customer lifetime value (CLV) is important because it helps businesses to better understand their customers and how much they are worth to the business. CLV can be used to improve customer acquisition and retention strategies, and to make more informed decisions about marketing and product development.

Here are some of the reasons why CLV is important:

It helps businesses to identify their most valuable customers. By understanding which customers are worth the most to the business, businesses can focus their resources on acquiring and retaining those customers.
It allows businesses to segment their customers based on their value. This information can be used to develop targeted marketing and sales campaigns.
It helps businesses to develop strategies to increase customer retention. By understanding what factors are driving customer churn, businesses can develop strategies to keep their customers coming back.
It helps businesses to optimize their marketing spend. By knowing how much each customer is worth to the business, businesses can allocate their marketing budget more effectively.
It helps businesses to make informed decisions about product development and pricing. By understanding what customers are willing to pay for products and services, businesses can develop products and pricing strategies that are more likely to be successful.

Overall, CLV is an important metric for businesses of all sizes. By tracking and understanding CLV, businesses can make better decisions about their customer relationships and improve their overall profitability.

Here are some additional benefits of focusing on CLV:

Increased profitability. Businesses with high CLV are more profitable than businesses with low CLV. This is because they are able to generate more revenue from each customer over the course of their relationship.
Improved customer satisfaction. Businesses that focus on CLV are more likely to have satisfied customers. This is because they are focused on providing a great customer experience and meeting the needs of their customers.
Reduced customer churn. Businesses with high CLV are more likely to retain their customers. This is because they are focused on building long-term relationships with their customers.
Increased brand loyalty. Businesses with high CLV are more likely to have loyal customers. This is because their customers have had a positive experience with the business and are more likely to recommend it to others.

If you are not already tracking CLV, I encourage you to start doing so. It is a valuable metric that can help you to improve your business in many ways.

How to Calculate Customer Lifetime Value

Historic Customer Lifetime Value

Historic CLV is the sum of gross profit from historic transactions of a particular customer. All gross profit values are summed up to transaction N (N is the last transaction). If a business has access to the transactional data of every customer, this can be calculated in Excel formula or can get it calculated automatically with software.

CLV (Historic) = (Transaction1+Transaction2+Transaction3…+TransactionN) X AGM

Where,

AGM = Average Gross Margin

Customer Lifetime Value calculation based upon net profit ultimately provides the final profit, an individual customer is contributing to the business. This considers cost associated with customer services, acquisitions, cost of returns, marketing tools, etc. However, calculating individual customers can be very complex especially when the figures need to be updated constantly. Gross margin CLV will provide insights about actual profitability of customers to date.

Predictive Customer Lifetime Value

Predictive CLV algorithms tend to provide a more accurate value of CLV by predicting the total value an individual customer will give to the business in the entire lifetime. In simple words,

‘CLV is the NPV of the sum of all future revenues from a customer less all costs associated with that customer.’

In practice, this can be very hard to attain because of the requirements of updated discount rates. Predictive CLV can be calculated in different ways like Simple and Detailed.

Simple

CLV = ((T x AOV) AGM) ALT

Where:

T = Average monthly transactions
AOV = Average order value
ALT = Average Customer Lifespan (in months)
AGM = Average gross margin

Let’s call the above equation gross margin contribution per customer lifespan (GML).

Detailed

CLV = GML (R/1+D-R)

Where:

R = monthly retention rate
D = monthly discount rate

Customer Lifetime Value Case Studies

Customer Lifetime Value (CLV) is the total revenue a customer is expected to generate for a business over the entire course of their relationship. It is an important metric for businesses to track because it can help them to make more informed decisions about their customer relationships.

Here are some customer lifetime value case studies:

Amazon: Amazon Prime members have a CLV that is twice as high as regular Amazon customers. This is because Amazon Prime members spend more money on Amazon and are more likely to remain active customers.
Starbucks: Starbucks has a CLV of $14,099 per customer. This is due to the fact that Starbucks customers are loyal and spend a lot of money on coffee and other products.
Netflix: Netflix has a CLV of $1,233 per customer. This is because Netflix customers are loyal and watch a lot of TV shows and movies.

These case studies show that CLV is a valuable metric for businesses of all sizes. By tracking and understanding CLV, businesses can make better decisions about their customer relationships and improve their overall profitability. Here are some additional benefits of focusing on CLV:

Increased profitability. Businesses with high CLV are more profitable than businesses with low CLV. This is because they are able to generate more revenue from each customer over the course of their relationship.
Improved customer satisfaction. Businesses that focus on CLV are more likely to have satisfied customers. This is because they are focused on providing a great customer experience and meeting the needs of their customers.
Reduced customer churn. Businesses with high CLV are more likely to retain their customers. This is because they are focused on building long-term relationships with their customers.
Increased brand loyalty. Businesses with high CLV are more likely to have loyal customers. This is because their customers have had a positive experience with the business and are more likely to recommend it to others.

If you are not already tracking CLV, I encourage you to start doing so. It is a valuable metric that can help you to improve your business in many ways.

Here are some examples of how businesses can use CLV to improve their business:

Target marketing and sales efforts: Businesses can use CLV to segment their customers and develop targeted marketing and sales campaigns. For example, a business might target customers with a high CLV with special offers and discounts.
Make informed decisions about product development and pricing: Businesses can use CLV to make more informed decisions about product development and pricing. For example, a business might develop new products or services that are targeted at customers with a high CLV.
Improve customer retention: Businesses can use CLV to identify customers who are at risk of churning and develop strategies to keep them as customers. For example, a business might offer a discount to customers who are about to cancel their subscription.

Overall, CLV is a valuable metric that businesses can use to improve their customer relationships and overall profitability.

Advantages of Customer Lifetime Value

There are many advantages to focusing on CLV, including:

Increased profitability: Businesses with high CLV are more profitable than businesses with low CLV. This is because they are able to generate more revenue from each customer over the course of their relationship.
Improved customer satisfaction: Businesses that focus on CLV are more likely to have satisfied customers. This is because they are focused on providing a great customer experience and meeting the needs of their customers.
Reduced customer churn: Businesses with high CLV are more likely to retain their customers. This is because they are focused on building long-term relationships with their customers.
Increased brand loyalty: Businesses with high CLV are more likely to have loyal customers. This is because their customers have had a positive experience with the business and are more likely to recommend it to others.

In addition to these general advantages, there are also specific advantages that businesses can gain by focusing on CLV, such as:

Improved marketing and sales campaigns: Businesses can use CLV to segment their customers and develop targeted marketing and sales campaigns. This can lead to increased sales and improved ROI on marketing spend.
More informed product development decisions: Businesses can use CLV to understand which products and services are most valuable to their customers. This information can be used to make more informed decisions about product development and pricing.
Better customer service: Businesses can use CLV to identify their most valuable customers and provide them with a higher level of customer service. This can help to reduce customer churn and increase customer satisfaction.

Overall, focusing on CLV is a win-win for businesses and their customers. Businesses can increase their profitability, improve customer satisfaction, and reduce customer churn. Customers can benefit from a better customer experience and more valuable products and services.

Here are some tips for businesses that want to focus on CLV:

Collect data on customer purchase history, customer retention, and average purchase value.
Use this data to calculate CLV for each customer.
Segment your customers based on their CLV.
Develop targeted marketing and sales campaigns for each customer segment.
Use CLV to make informed decisions about product development, pricing, and customer service.

By following these tips, businesses can focus on CLV and reap the many benefits that it has to offer.