The bo"om line

What is Customer Lifetime Value (CLV)?

Customer Lifetime Value (CLV), or the lifetime value of a customer, is the metric indicating the total revenue a business can reasonably
expect from a single customer account
account. The longer a consumer continues to purchase from a business, the greater their lifetime value
becomes.

What is Customer Lifetime Value (CLV)?

More than just a simple exchange of goods over money, CLV is a measurement of how valuable a customer is to your business
business, not just
on a purchase-by-purchase basis but across the whole relationship. And because it is less expensive to keep existing customers than finding
new ones, keeping your CLV high can be essential to your business’s success. After all, a higher CLV means you have more loyal customers.

Therefore, understanding CLV helps businesses develop appropriate strategies to acquire new customers and retain existing ones, while
maintaining profit margins.

Customer Lifetime Value formula

The simplest way to calculate Customer Lifetime Value is:

CLV = Average Purchase Value x Average Purchase Frequency Rate x Average Customer Lifespan

Ge"ing stuck with the math? Don’t worry, let’s break the formula down step-by-step together.

1. Calculate the Average Purchase Value

This is the amount of money a consumer spends on each transaction. You calculate this number by dividing total customer revenue in a time
period (usually one year) by the number of purchases over the same period.
 Average Purchase Value = Total Revenue Earned / Number of Transactions

2. Calculate the Average Purchase Frequency Rate

This indicates how often customers return to purchase from you. Divide the number of purchases by the number of unique consumers who
made purchases over the same period.

Average Purchase Frequency Rate = Number of Orders Placed / Number of Unique Customers

3. Calculate Customer Value

You calculate this number by multiplying the Average Purchase Value by the Average Purchase Frequency Rate.

4. Calculate Average Customer Lifespan

You calculate this number by looking at the number of years over which a consumer purchases from you and finding the average.

5. Calculate Customer Lifetime Value (CLV)

You multiply the Customer Value by the Average Customer Lifespan to get the Customer Lifetime Value.

CLV = Customer Value x Average Customer Lifespan

Customer Lifetime Value examples

Example 1

Using data from Kissmetrics, we can take Starbucks as an example of determining CLV. The report measures the weekly purchasing habits of
five customers, then averages their total values together. By following the steps above, we can calculate the average lifetime value of a
Starbucks customer.

1. Calculate the Average Purchase Value

Kissmetrics studies that the average Starbucks customer spends about $5.90 each visit. We can compute this by averaging the money spent
by a customer in each visit during the week. For instance, if you went to Starbuck 4 times, and spent $20 total, your average purchase value
would be $5.

Once you calculate the average purchase value for one customer, you can repeat the process for the other four. After that, add each
average together, then divide that value by the number of customers surveyed (5) to get the average purchase value.

2. Calculate the Average Purchase Frequency Rate

To calculate this number, you need to know how many visits the average customer makes to one of their locations within a week. The average
observed across the 5 customers in the report was found to be 4.2 visits. That makes the Average Purchase Frequency Rate 4.2.

3. Calculate Customer Value

The Average Customer Value of Starbucks was reported to be $24.30.

To calculate this, you need to look at 5 customers individually, then multiply their Average Purchase Value by their Average Purchase
Frequency Rate. This allows you to know how much revenue the customer is worth to Starbucks within a week. You repeat this calculation for
all 5 customers and get the result of $24.30.

4. Calculate Average Customer Lifespan

Although the report doesn’t state how it measured Starbucks’ average customer lifespan, it does list this value as 20 years.
If you were to calculate this number, you would have to look at the number of years each customer frequented Starbucks and then average
the values together to get 20 years. If you don’t have 20 years to wait and verify, one way to estimate this number is to divide 1 by your churn
rate percentage.

5. Calculate Customer Lifetime Value (CLV)

Finally, you need to multiply the average customer value by 52. Because you were measuring customers on a weekly basis, you need to
multiply their customer value by 52 (weeks) to reflect an annual average.

So, the Customer Lifetime Value of Starbucks turns out to be: 52 x 24.30 x 20 = $25,272

Example 2

For instance, a professional runner who buys shoes from your store might be worth: $200 per pair of shoes x 5 pairs per year x 8 years =
$200 x 5 x 8 = $8,000

And an o!ice employee might be worth: $50 per pair x 6 pairs per year x 3 years = $50 x 6 x 3 = $900

So, who should you pay more a"ention to? Obviously, the professional runners in your database.

Why is Customer Lifetime Value important?

Calculating Customer Lifetime Value for di!erent customers helps in various ways, mainly regarding business decision-making. CLV is unique
in that it can look forward
forward, as opposed to a concept like a customer profitability, which measures past activities to gain insights.

Much like you should always look into the future to determine which products to sell, di!erent ways to optimize your business, and how to
serve your customers be"er, CLV can forecast future activity to improve your bo"om line.

So, to be specific, CLV is an essential metric as it helps you:

Calculate customer’s future value

value. CLV helps you predict the amount you can gain from a customer throughout the business
relationship.

Understand customer behavior be"er

be"er. Actually, you can segment your customer data into di!erent categories based on their lifetime
values. Then, it’s easier for you to identify customers that are likely to churn early and act proactively. To boost customer retention in
particular segments, you can extend specific discount rates or o!ers, for example.

Identify the most profitable customer segment

segment. Calculating CLV helps you identify the most profitable, profitable, least profitable,
and not profitable customer segments. You can then distribute your customer acquiring and retention budgets to get the most out of these
segments.

Identify the most profitable o!ering segment

segment. CLV also gives a hint as to which products are a"racting the most a"ention from
customers. This helps you improve your existing o!ering (s) and launching other o!erings that complement the same and increase your
profits using upselling and cross-selling.

Define future strategies and invest resources be"er

be"er. CLV helps develop your future strategies to invest resources in a way that may
benefit your business most.

What is a good Customer Lifetime Value?

It’s hard to say exactly what a good Customer Lifetime Value is, as it depends on factors like your specific industry and your Customer
Acquisition Cost (CAC)
(CAC). There is the general rule that the higher your CLV, the greater your profits, but you can only be"er understand
your ideal benchmark when comparing it to your CAC.

Each industry and each business has its own cost for acquiring a new customer, so what is considered a good CLV for you might be di!erent
from that of someone else. It also depends heavily on how much each company is willing to spend on their marketing and sales e!orts. By
analyzing both values, you will have a clearer picture of how profitable your business will be, and if you need to take any further actions to
improve it.
 CLV/CAC ratio

The rule of thumb to most is that the ideal CLV: CAC ratio is 3:1
3:1. That means that it’s expected that a customer spends three times more
than what it cost you to acquire them. However, in fact, most companies are not able to achieve this.

A study by Fuel - a McKinsey company found that most SaaS companies have a ratio between 1 and 3. Although their average mean value
was 3.4, the median was only 2.8. This shows that most companies (or at least SaaS ones) fall on the lower end of the conventional CLV: CAC
ratio of 3.

The study also noticed that growth rates were correlated to a higher ratio. Businesses with a ratio higher than 3 seemed to grow at an
average annual rate of 42%. While those at 3 or below grew at a slower rate of 28% annually on average. That proves the business growth is
strongly a!ected by the di!erence between your CLV and CAC values.

One typical example of CLV and CAC is the Dropbox story. When it first started, Dropbox was using Google ads to acquire customers. Its
CAC was $100, which is really not that high - but its CLV was only $99. That meant it was dying a slow death.

So, the company decided to turn its Google ads o! and switched to an a!iliate referral program. The company paid a!iliate extra space for
each new user referred. That decision significantly reduced its CAC and made it the multibillion-dollar company it is today.

6 Ways to improve your Customer Lifetime Value

As mentioned earlier, retaining customers is much more cost-e!ective than acquiring new ones, so it’s essential that you find strategies to
increase your CLV, especially for the newcomers.

Among a lot of ways, we’ll mention the 6 most e!ective strategies in this section. Just follow us!

1. Segment your customers by their CLV

One way to increase your CLV is by segmenting your customers based on how much revenue they bring to your business. Although this
doesn’t directly increase your CLV, it’s an e!ective strategy to take into consideration.