What is Customer Lifetime Value, and How To Calculate It?

Read this blog to understand how Customer Lifetime Value (CLV) can help your business optimize marketing efforts, improve customer retention, and increase profitability.

Author

Soham Saha

Date

June 2, 2024

Customer Lifetime Value, or CLV, is the correlation of the product’s cost or other benefits to the entire time the client may spend using services associated with the promoted item. In some cases, it may also be included in the notion of a product’s lifetime in terms of the time frame when the client remains in demand. Additionally, focusing on CLV encourages companies to provide better customer service and product quality, ultimately increasing customer satisfaction and profitability.

Our latest blog will help you understand Customer Lifetime Value and demonstrate how to calculate it. Using proven strategies and tools, you’ll see ways to increase your business's CLV. You’ll also understand the meaning of this crucial metric, making your marketing effective and your business prosperous.

What is Customer Lifetime Value (CLV)?

Customer Lifetime Value (CLV) measures the total revenue a business can expect to earn from a single customer over the entire relationship duration. It considers all future purchases the customer will make, helping businesses understand the long-term financial value each customer brings. 

This metric is essential for determining how much a company should invest in acquiring and retaining customers guiding marketing and customer service strategies to maximize profitability.

How to Calculate Customer Lifetime Value (CLV)?

Customer Lifetime Value (CLTV) is a metric that tells you how much a customer is worth to your business throughout your relationship. It's important because it helps you prioritize customer acquisition and retention efforts.

There are two main parts to calculating CLTV:

Customer Value

This is the average amount of money a customer spends with your business over a specific period. It's calculated by multiplying the average purchase value by the average purchase frequency.

Average Customer Lifespan

This is the average time a customer stays with your business. There are different ways to calculate this, but a common method is to look at historical customer data and see how long the average customer remains active.

Once you have these two figures, you can multiply them to get your CLTV:

Here's a breakdown of how to calculate each part:

  • Customer Value

Average purchase value = Total revenue / Number of purchases (in a specific timeframe)

Average purchase frequency = Total number of purchases / Number of customers (in the same timeframe)

Customer value = Average purchase value x Average purchase frequency

  • Average Customer Lifespan

This can be estimated based on historical data (e.g., average customer tenure)

Example of Customer Lifetime Value (CLV)

Let's consider a subscription-based streaming service, such as Netflix. Here's how Customer Lifetime Value (CLV) can be calculated and understood in this context:

Let’s assume Netflix wants to determine the CLV of an average subscriber.

  • Monthly Subscription Fee: $15
  • Average Customer Lifespan: 3 years (36 months)
  • Customer Acquisition Cost (CAC): $50
  • Monthly Retention Costs: $2 per customer (includes customer service, retention marketing, etc.)

Calculation:

Total Revenue per Customer:

Total Revenue = Monthly Subscription Fee × Average Customer Lifespan

Total Revenue = $15 × 36 = $540

Total Cost per Customer:

Total Cost = Customer Acquisition Cost + (Monthly Retention Costs × Average Customer Lifespan )

Total Cost = $50 + ($2 × 36) = $50 + $72 = $122

Customer Lifetime Value (CLV):

CLV = Total Revenue − Total Cost

CLV = $540 − $122 = $418

Therefore, Netflix's average Customer Lifetime Value is $418. Each subscriber will generate an average of $418 in profit throughout their relationship with the service.

Thus, we can take the following implications:

  • Marketing Spend: Netflix can justify spending up to $418 on acquiring and retaining each customer while remaining profitable.
  • Customer Retention: By understanding the CLV, Netflix can allocate resources more effectively towards retaining customers, knowing that each additional month a customer remains subscribed significantly contributes to overall profitability.
  • Strategic Planning: Insights from CLV help Netflix plan long-term strategies for customer engagement, content creation, and service improvements to maximize customer satisfaction and extend the average customer lifespan.

Why is Customer Lifetime Value Important?

Customer Lifetime Value (CLV) is crucial for several reasons, each contributing to a business's overall success and sustainability. Here are the key points explained in detail:

Informed Marketing Spend

It helps determine how much companies can spend to acquire a new customer. CLV allows enterprises to make marketing budgets and advertising strategies based on accurate data for every customer’s lifetime value. Such an approach also allows users to adjust marketing spending more accurately and invest in advertising campaigns focusing on acquiring high-value customers.

Enhanced Customer Retention Strategies

Customer lifetime value helps determine the most valuable customer groups. Businesses can develop strategies to keep the highest value customers loyal and satisfied. For example, this can be achieved through personalized offerings, loyalty programs, and great customer service. Moreover, retaining an existing customer is often more cost-effective than acquiring a new one. Thus, customer lifetime value enables businesses to give retention its due.

Optimized Customer Acquisition

The concept of CLV can enable businesses to create more effective customer acquisition solutions. By understanding this concept, companies can concentrate on higher lifetime valued customers, introducing growth more profitably and sustainably since these customers are more likely to return and remain loyal.

Improved Product and Service Development

Business ideas can be built around different customer-related themes. Since the CLV metric measures the total revenue generated throughout the customer's lifetime, active or passive, it can help understand how to design the products and services that will meet the needs of the vendor’s most valuable customers. For that purpose, it will be necessary to research the preferences of high-CLV customers and adjust the products to meet their needs as closely as possible. 

Better Financial Forecasting

CLV, or Customer Lifetime Value, is an essential financial planning and forecasting metric. It allows businesses to identify how much revenue they can make by understanding their customers' value over time. Hence, CLV can be a tool for budgeting, resource allocation, and strategic planning. Moreover, it can help to identify potential risks and performance improvement opportunities.

Enhanced Customer Experience

Another major benefit of maximizing CLV is that it incentivizes businesses to invest in customer experience. Because high-CLV customers often continue to patronize a particular brand because they are satisfied or even impressed with what they have received, companies that invest in customer experience also benefit from strengthening relationships, encouraging continued business, building brand loyalty and positive word-of-mouth referrals, and ultimately being more successful in the long term.

Strategic Business Decisions

CLV allows assessing the value that customers provide over the entire time of their relationships with the company. This approach is essential in many strategic marketing decisions, such as new market and product entry, forwarding and integration expansion, merger and acquisition activity, and others, as it helps evaluate the impact of these purposes on the company's profitability from a long-term perspective. For this reason, CLV should be considered an integrated component of the long-term strategy of customer value maximization.

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How to Improve CLV?

Improving Customer Lifetime Value (CLV) involves several strategies to enhance customer satisfaction, loyalty, and engagement. Here are some effective methods to boost CLV:

Enhance Customer Onboarding

A smooth and informative onboarding process sets the tone for the customer relationship. Ensure that new customers understand how to use your product or service effectively. Provide tutorials, guides, and personalized support to help them get started. A positive first experience can lead to higher satisfaction and long-term loyalty.

Offer Personalized Experiences

Personalization helps in making customers feel valued and understood. Use data analytics to tailor recommendations, offers, and communications based on customer preferences and behaviors. Personalized experiences increase customer satisfaction and the likelihood of repeat purchases.

Implement Loyalty Programs

Loyalty programs reward customers for their repeat business and encourage them to purchase from you. Offer points, discounts, or exclusive benefits for frequent purchases. Effective loyalty programs not only increase CLV but also enhance customer retention.

Provide Excellent Customer Service

High-quality customer service is crucial for retaining customers. Ensure that your customer support team is responsive, knowledgeable, and empathetic. Promptly address customer issues and complaints to maintain trust and satisfaction. Exceptional service can turn one-time buyers into loyal customers.

Regularly Engage with Customers

Communicate regularly with your customers through email newsletters, social media, and other channels. Share valuable content, updates, and offers to keep your brand in mind. Engaging with customers consistently helps build a strong relationship and encourages repeat business.

Upsell and Cross-Sell Effectively

Identify opportunities to upsell and cross-sell products or services that complement the customer's purchase. Provide relevant recommendations based on their purchase history and preferences. Effective upselling and cross-selling increase the average transaction value and CLV.

Collect and Act on Customer Feedback

Regularly seek feedback from your customers to better understand their needs and preferences. Use surveys, reviews, and direct interactions to gather insights. Act on this feedback to improve your products, services, and overall customer experience. Customers appreciate businesses that listen to and act on their input.

Offer Subscription Services

Subscription models can significantly boost CLV by ensuring recurring revenue from customers. If applicable, offer subscription options for your products or services. This creates a predictable revenue stream and encourages long-term customer relationships.

Improve Product and Service Quality

Continuously invest in enhancing the quality of your products and services. Customers are more likely to remain loyal to brands that consistently meet or exceed their expectations. Regularly update and innovate your offerings to keep them relevant and valuable.

Create a Strong Brand Community

Foster a sense of community around your brand. Encourage customers to interact with each other and with your brand through social media groups, forums, or events. A strong brand community increases customer engagement and loyalty, leading to higher CLV.

How Is Customer Lifetime Value Different from Other Customer Metrics?

Customer Lifetime Value (CLV) differs from other customer metrics in several ways, primarily due to its comprehensive nature and focus on long-term profitability. Here are some key distinctions between CLV and other common customer metrics:

Revenue vs. Profit Focus

CLV: Focuses on the total profit a business can expect from a customer over the entire relationship duration. It considers the revenue generated and the costs associated with acquiring and retaining the customer.

Other Metrics: Many customer metrics, such as Average Revenue Per User (ARPU) and Customer Revenue, focus primarily on customer revenue without accounting for costs.

Time Horizon

CLV: Looks at the long-term value of a customer, projecting future revenues and costs over the entire lifespan of the customer relationship.

Other Metrics: Monthly Recurring Revenue (MRR) or Quarterly Revenue typically focuses on shorter time frames, providing a snapshot of performance over a specific period.

Comprehensive View

CLV provides a holistic view of customer value by incorporating multiple factors, such as purchase frequency, average order value, customer retention rate, and acquisition and retention costs.

Other Metrics: Customer Acquisition Cost (CAC) or Customer Retention Rate focuses on specific aspects of customer relationship management without providing an overall picture of customer value.

Strategic Insight

CLV: Offers strategic insights into how much a business should invest in acquiring and retaining customers, guiding long-term marketing and customer service strategies.

Other Metrics: Metrics such as Net Promoter Score (NPS) or Customer Satisfaction Score (CSAT) provide insights into customer satisfaction and loyalty but do not directly inform financial investment decisions.

With Qatalyst’s pre-built NPS Over Time template, you can capture user sentiment as users experience your live site or product. Embed it as an in-product prompt to collect ongoing insights across live websites to develop insight trends that signal customer satisfaction.

Profitability Measurement

CLV measures customer profitability, helping businesses identify the most valuable customer segments and optimize their marketing efforts accordingly.

Other Metrics: Conversion Rate or Churn Rate measures specific aspects of customer behavior and engagement but does not directly indicate profitability.

Customer Behavior and Trends

CLV: Analyzes customer behavior over the long term, identifying trends in purchasing patterns, retention, and profitability.

Other Metrics: Metrics such as Customer Engagement or Interaction Rate focus on short-term behaviors and interactions without necessarily linking them to long-term value.

Investment Justification

CLV helps justify investments in customer acquisition and retention by clearly showing each customer's expected return on investment (ROI).

Other Metrics: Metrics like Marketing ROI or Return on Ad Spend (ROAS) provide insights into the efficiency of marketing campaigns but do not link directly to individual customer profitability over time.

Final Words

Today, in the highly competitive business environment, the importance of Customer Lifetime Value must be considered. Indeed, by analyzing CLV metrics, companies can find valuable information about the target audience, which can then be used to promote marketing and enhance customer retention strategies. 

Consequently, companies that use CLV as the blueprint for choosing strategies will generate more revenue and remain competitive in the continuously evolving market.

With Qatalyst, you can delve deep into how customers respond to new features, assess whether updates enhance or affect their workflow, and gauge their overall sentiment when engaging with your product. This invaluable insight provides a comprehensive understanding of user experiences and catalyzes increasing product satisfaction. 

By actively listening to customer feedback and promptly addressing pain points or areas for improvement, you can cultivate a product that aligns closely with user needs and preferences, ultimately fostering higher levels of satisfaction and loyalty among your customer base.

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Frequently Asked Questions

How do you calculate a customer's lifetime value (LTV)?

To calculate a customer's Lifetime Value (LTV), you need to determine the average purchase value, the purchase frequency, and the customer's lifespan. Multiply the average purchase value by the purchase frequency to get the customer value, then multiply this by the average customer lifespan.

What is the ideal lifetime value of a customer?

The ideal lifetime value of a customer varies by industry and business model, but generally, a high LTV indicates that a customer generates substantial revenue over their relationship with the company. It should be significantly higher than the cost of acquiring that customer to ensure profitability.

How many years is the customer's lifetime value?

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The customer's lifetime value is typically calculated over a period that reflects the average duration a customer continues to purchase from the company. This can range from a few years in fast-moving consumer goods to several decades in industries like insurance or automotive.

What is the customer lifetime value of CLV Modelling?

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With lots of unique blocks, you can easily build a page without coding.

2

Click on Study templates

With lots of unique blocks, you can easily build a page without coding.

3

Start from scratch

With lots of unique blocks, you can easily build a page without coding.

4

Add blocks to the content

With lots of unique blocks, you can easily build a page without coding.

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Saving the Template

With lots of unique blocks, you can easily build a page without coding.

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With lots of unique blocks, you can easily build a page without coding.

In CLV modeling, customer lifetime value estimates the total revenue a business can expect from a single customer account throughout the business relationship. This model helps understand customer behavior, guide marketing strategies, and optimize customer retention efforts.

How is CLV calculated?

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With lots of unique blocks, you can easily build a page without coding.

2

Click on Study templates

With lots of unique blocks, you can easily build a page without coding.

3

Start from scratch

With lots of unique blocks, you can easily build a page without coding.

4

Add blocks to the content

With lots of unique blocks, you can easily build a page without coding.

5

Saving the Template

With lots of unique blocks, you can easily build a page without coding.

6

Publish the Template

With lots of unique blocks, you can easily build a page without coding.

CLV is calculated by multiplying customer value by the average lifespan and average purchase value by the average purchase frequency. In short, it estimates a customer's total revenue over their relationship with your business.

Author Bio

Soham is a true Manchester United fan who finds joy in more than just football. Whether navigating the open road, scoring virtual goals in FIFA, reading novels, or enjoying quality time with friends, Soham embraces a life full of diverse passions.

Soham Saha

Product Marketing Specialist

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