Customer Lifetime Value Calculator: A Complete Guide to CLV

A Complete Guide to CLV

Customer lifetime value (CLV), often referred to as CLTV or LTV, is one of the most important business metrics for a company. CLV is a popular metric because it’s directly tied to revenue. By measuring CLV in relation to customer acquisition costs (CAC) and customer retention, companies can better prioritize their focus and funds. As a revenue metric and statistic, CLV can be employed to understand both historical customer behavior and help forecast future customer behavior.

Simply calculating and knowing CLV isn’t enough though. To get the most out of CLV metrics, businesses must improve their customer experience (CX) strategies. Our guide below gives insights into how CX relates to customer lifetime value and offers key CX tactics that companies can execute to increase their CLV and their bottom line. To quickly compute either an individual customer’s CLV or average CLV, jump to our easy-to-use customer lifetime value calculators now.

What is Customer Lifetime Value

Customer lifetime value (CLV) represents the total amount of money a customer will bring to a company throughout the business relationship.

CLV can help determine the amount of money and effort that should be invested in acquiring new clients versus working towards retaining existing ones. A business typically profits more from existing customers than hustling to acquire new ones. According to Marketing Metrics, the probability of converting a new customer is 5–20%. This is a much lower conversion rate compared to converting an existing prospect, who converts 60–70% of the time.

The longer a customer pays for a company’s services, the more significant their lifetime value becomes. A company’s CX team directly affects CLV and profit due to their impact on the customer journeyand ability to reduce a businesses’ churn rate . Before further examining how CX can improve CLV , let’s discuss how to properly calculate CLV.

Individual Customer Lifetime Value Calculator

Ideally, a company wants to be able to calculate both their average CLV and individual customer’s CLV. Below, we will discuss how to calculate an individual customer’s lifetime value to help businesses determine which customers matter the most.

To calculate individual CLV a corporation needs to know how much customers purchase, how often, and their general overhead costs.

Individual Customer Lifetime Value Formula

The customer lifetime value formula is fairly simple. To better understand the formula, we’ll need to define its components first.

Customer Lifetime Value Term Definitions

Let’s put these newly-defined terms together in the individual CLV formula:

Here is an example of how to calculate an individual customer’s lifetime value that regularly pays for a product or service.

  • The customer pays $50 for a product (purchase value = $50).
  • The customer makes the $50 payment four times a year (purchase frequency = 4x annually).
  • For the past 3 years, the customer has consistently paid for a product (average customer duration = 3 years).
  • $50 x 4 x 3 = $600 (Individual Customer Lifetime Value).

Average Customer Lifetime Value Calculator

To determine a company’s average customer lifetime value, they will need to know the totals and averages of orders, revenue, and the number of customers per a specific period—typically one year. Let’s take a look at the components of a company’s average CLV.

Companies’ Average Customer Lifetime Value Formula

The formula for computing a company’s average CLV involves fairly straightforward division and multiplication.

Companys Average Customer Lifetime Value Formula

Average Purchase Value: Calculate this number by dividing the total revenue in a period (usually one year) by the number of orders in that same timeframe.

Average Frequency Rate: Continuing with the same timeframe in mind, calculate this metric by dividing the number of orders by the number of unique customers.

Customer Value: Calculate this number by multiplying the average purchase value by the average frequency rate.

Average Customer Lifespan: Calculate this unit by averaging the amount of time a customer continues to purchase from your business. Use the same measurement of time as you did for calculating customer value.

Company’s Average Customer Lifetime Value: Finally, to get your company’s average CLV you multiply customer value by average customer lifespan.

Why Customer Lifetime Value Matters to Businesses

CLV can influence both revenue decisions and the way in which a business interacts and serves its customers. Knowing a company’s average CLV can help determine the following:

Why Customer Lifetime Value Matters to Businesses

How to Improve Customer Lifetime Value

Knowing individual customer lifetime value or a company’s average customer lifetime is just the starting point. To make the most out of this newfound knowledge a business must improve both its CX and customer satisfaction (CSAT). These tips below will help a business develop its CX and therefore increase its CLV.

Address Customer Pain Points

Not much will make a customer drop faster than not being able to get past a frustrating pain point. Customers will often turn to competitors to see if their services aren’t bogged down with these pain points.

These pain points often range from lack of support (not feeling heard by the company), financial reasoning (not worth the return on investment), or productivity (too time or effort-intensive). The best way for a business to address these pain points is to follow up with surveys after customers interact with them.

Survey Customers

While CLV focuses primarily on revenue, an enterprise will want to supplement its findings with qualitative data. This qualitative data should be a sentiment analysis, measuring customer effort score (CES), net promoter score (NPS), and CSAT.

The best way to calculate NPS and CSAT scores is to survey customers after they interact with a service, such as directly after trying a demo or getting off the phone with a customer service representative.

Analyze Retention Rates

According to Harvard Business Review, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one. Simply put, retention rate matters. Fred Reichheld of Bain & Company’s research further emphasizes the importance of retaining clients and producing repeat buyers. Reichheld found that, “a 5% increase in customer retention produces more than a 25% increase in profit.”

CLV can help determine at what point along the customer journey or in time do customers begin to churn. For instance, a business might lose customers after one year due to an increase in pricing in the second year. Or, clients stop using a company’s services after a certain point in using the product due to difficulty in user experience or loss of need.Quick Lifetime Value Boosts and Strategies

These strategies involve low effort but have the possibility of high reward if done correctly.

  • Increase the frequency of orders or the average order size
  • Contact previously lost customers and one-time purchasers
  • Create a rewards program for repeat purchasers
  • Upsell by adding additional free services or software programs

Calculating individual and company-wide CLV is incredibly important and useful. Nearly any company will be able to tell which customers spend the most and who has remained loyal for the longest. Furthermore, nearly any size business can measure CLV, regardless if they’re a pre-seed startup or a mega-corporation. If businesses want to grow their CLV, they should look first into developing a CX department.

Sources: Marketing Metrics | Harvard Business Review | Bain & Company