lifetime value in business plan

How to Calculate Customer Lifetime Value (CLV) & Why It Matters

Published: September 18, 2023

It's easier to sell to an existing customer than it is to acquire a new one.

The last thing you want is for customers to churn before you recoup the investment required to earn their business in the first place.

One of the best ways to fix retention issues is by measuring customer lifetime value (CLV or CLTV). Doing so will help your business acquire and retain highly valuable customers , which results in more revenue over time.

Continue reading or jump ahead:

What is customer lifetime value (CLV)?

Why is customer lifetime value important, customer lifetime value models, customer lifetime value formula, customer lifetime value metrics, customer lifetime value example, tips to increase customer ltv.

Customer lifetime value (CLV or CLTV) is a metric that indicates the total revenue a business can reasonably expect from a single customer account throughout the business relationship.

The metric considers a customer's revenue value and compares that number to the company's predicted customer lifespan.

Customer LTV is something that customer support and success teams can directly influence the customer's journey .

The longer your customer continues to purchase from your company, the greater their lifetime value becomes.

Free Customer Lifetime Value Calculator

Calculate CLV with this free template, alongside other metrics like:

Customer Acquisition Cost

• Customer Lifetime Value
• Customer Satisfaction Score

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• Increasing CLV can increase revenue over time.
• It can help you find issues so you can boost customer loyalty and retention.
• It helps you target your ideal customers.
• Increasing CLV can help reduce customer acquisition costs.
• CLV can simplify financial planning.
• CLV trends can show you how to improve your products and services.

Customer lifetime value helps you understand the growth and revenue value of each customer over time. This metric is important to any business because it can help your business:

• Boost customer loyalty
• Reduce churn
• Improve strategic decision-making

For example, you can use customer lifetime value to find the customer segments that are most valuable to your company.

Here are some other reasons why understanding your CLV is essential.

1. Increasing CLV can increase revenue over time.

The longer the lifecycle or the more value a customer brings during that lifecycle, the more revenue a business earns.

Therefore, tracking and improving CLV results in more revenue.

CLV helps you find the specific customers that contribute the most revenue to your business. You can use this information to segment your audience by the value those customers bring.

Once you find those customers, you can encourage repeat purchases and find specific cross-selling and upselling opportunities for different segments of your audience. Or you can tailor your products or marketing to your highest spenders to keep them coming back for more.

2. It can help you identify issues so you can boost customer loyalty and retention.

If CLV is a priority in your business, you can use it to identify impactful trends in your customer data. This insight can help you stay ahead of competition with action items to address those changes.

CLV helps you understand customer behavior, preferences, and spending patterns. With this analysis, you can improve your data-driven decision-making. This leads to more personalized marketing strategies for growth.

For example, say your CLV is low. You can work to optimize your customer support strategy or loyalty program to better meet the needs of your customers. Or you can optimize a new product to attract higher-value customers.

3. It helps you target your ideal customers.

Customer lifetime value tracking makes it easier to segment your customers. You can segment based on profitability, customer needs, preferences, or behavior.

When you know the lifetime value of a customer, you also know how much money they spend with your business over some time — whether it's $50, $500, or $5000.

Armed with that knowledge, you can develop a customer acquisition strategy that targets customers who will spend the most at your business. You can personalize marketing to attract and retain them, and effectively allocate resources to get the most value from your efforts.

4. Increasing CLV can help reduce customer acquisition costs.

Acquiring new customers can be costly, and it's less expensive to retain a customer than it is to acquire a new one.

Customer lifetime value can help reduce costs with a focus on retaining existing customers. If you can keep a customer happy long-term, then you can improve their value to the business .

Using CLV metrics can improve customer loyalty and word-of-mouth referrals — it can also reduce marketing and sales expenses.

5. CLV can simplify financial planning.

The financial health of a business is often a big concern for CEOs and business owners.

Customer lifetime value helps you get a clear picture of your customers' relationship with your business and products. It can offer insights into future revenue streams and changes in customer behavior.

This knowledge can help you make more accurate predictions about future cash flows. So, CLV helps you reliably forecast revenue and plan the financial future of your business.

6. CLV trends can show you how to improve your products and services.

Understanding CLV can give you a better understanding of the value customers get from specific products or services.

With insights from your CLV you'll have a clear direction for further analysis. This may guide you to look at customer feedback and behavior, update pain points, or change your approach to product development.

Lifetime value data can help you find where to make key improvements that align with customer needs and boost satisfaction. This not only strengthens customer loyalty but also differentiates your company from competitors.

Now that we understand the importance of customer lifetime value, let's talk about the two main customer lifetime value models.

There are two models that companies will use to measure customer lifetime value.

Choosing between the two can result in different outcomes.

This depends on whether a business is looking at pre existing data, or trying to figure out the future behavior of customers based on current circumstances.

Predictive Customer Lifetime Value

The predictive CLV model forecasts the buying behavior of existing and new customers using regression or machine learning.

Using the predictive model for customer lifetime value helps you better identify your most valuable customers, the product or service that brings in the most sales, and how you can improve customer retention.

Historical Customer Lifetime Value

The historical model uses past data to predict the value of a customer without considering whether the existing customer will continue with the company or not.

With the historical model, the average order value is used to determine the value of your customers. You'll find this model to be especially useful if most of your customers only interact with your business over a certain period.

But because most customer journeys are not identical, this model has certain drawbacks.

Active customers (deemed valuable by the historical model) might become inactive and skew your data.

In contrast, inactive customers might begin to buy from you again, and you might overlook them because they've been labeled "inactive."

Read on to learn about the different metrics needed to calculate customer lifetime value and why they're important.

The customer lifetime value formula is Customer Lifetime Value = Customer Value x Average Customer Lifespan. The CLV result is the revenue you expect an average customer to generate during their relationship with your business.

Typically, lifetime value (LTV) calculates the overall value of all customers. But customer lifetime value (CLV) can also focus on the business value of specific customers or groups of customers.

The formula above is the standard formula to calculate CLV. But finding this important figure can be more complicated than it looks.

For example, the first time HubSpot marketing manager Jana Rumberger calculated customer lifetime value, it was a direct request from a company CEO. Jana had reached out to get approval for data analytics software, and before approval, they wanted a specific metric, CLV.

This was a small company where the majority of customers started on a freemium plan. The company tech stack made it tough to get accurate numbers for free to paid plan conversion, payment tiers, and plan retention.

Jana got approval for the software, but it wasn't able to give them the numbers they needed to calculate a reliable CLV for the business. It turns out calculating CLV wasn’t a priority when the business started and there were limited resources to update systems to collect this information. So, Jana’s team was unable to calculate customer lifetime value when they needed it to guide their strategy. In the end, figuring out an accurate CLV took months of manual data collection and analysis.

But using this free customer service metrics calculator , you have clear formulas to help find the data you need and calculate LTV for your business. Keep reading, or jump to the formula(s) you're looking for below:

How to Calculate Customer LTV

Average purchase value, average purchase frequency rate, customer value, average customer lifespan.

Customer Lifetime Value = (Customer Value * Average Customer Lifespan). To find CLTV, calculate the average purchase value x average number of purchases = customer value. Once you calculate the average customer lifespan, you can multiply that by customer value to determine customer lifetime value.

You can see both formulas below:

Customer Value = Average Purchase Value x Average Number of Purchases

Customer Lifetime Value = Customer Value x Average Customer Lifespan

There are many different ways to approach the lifetime value calculation. Keep reading to get an understanding of the most common CLV values. Then, analyze the variables that contribute to each to better serve your business needs.

Free Customer Service Metrics Calculator

Calculate your business's key metrics and KPIs for customer support, service, and success with this free template.

To calculate average purchase value:

Divide your company's total revenue in a period (usually one year) by the number of purchases throughout that same period.

Average purchase value helps you see the average amount of revenue each customer generates during a period. Analyzing this number also shows you:

• Opportunities to increase the value of each transaction
• New options for cross-selling and upselling
• Whether your pricing and packaging strategies are working

This data helps you find new and viable products or services and other strategies to increase value per transaction and revenue.

Average Purchase Value Challenges

Challenges that come up while calculating average purchase value include:

• Getting accurate and comprehensive data on individual customer transactions
• Inconsistent data across multiple channels or platforms
• Seasonal fluctuations in customer spending behavior
• Inconsistent purchasing patterns
• Variable customer segments or groups can skew data

Tips for Calculating Average Purchase Value

To solve for these common problems:

• Use a reliable CRM system that combines customer transaction data from different sources
• Set up automated data collection for consistent transaction data
• Regularly audit and clean up data to remove duplicates and errors
• Integrate channels and platforms for a centralized view of customer transactions
• Analyze customer spending behavior over different seasons and adjust accordingly
• Review segment criteria to make sure customer groups are accurate
• Assign priority to different customer segments

To calculate average purchase frequency rate:

Divide the number of purchases by the number of unique customers who made purchases during that period.

Recent research says that a 5% customer retention increase can create a 25%+ increase in profit.

Average Purchase Frequency Rate is essential for calculating CLV because it shows you how often customers make repeat purchases. This metric also offers insights into:

• Customer engagement and loyalty
• Trends in customer behavior over time
• Churn reduction
• Future revenue streams

Average Purchase Frequency Rate Challenges

Like average purchase value, inconsistent or incomplete data can also distort your purchase rate numbers.

Other challenges include:

• Purchase cycle timing, which can get skewed by industry trends or product releases
• Changing customer buying patterns
• Seasonality

Tips for Calculating Average Purchase Frequency Rate

• Track and analyze customer data to capture changing customer buying patterns
• Regularly review and update customer segmentation based on buying patterns
• Offer personalized promotions to inspire more consistent spending
• Conduct customer surveys or interviews for insights into reasons behind changing purchase patterns

To calculate customer value, figure out the average purchase value for your products. Then, calculate the average number of purchases per customer (also called purchase frequency rate). When you multiply these two figures, it will give you the customer value.

Customer value is important in calculating CLV because it makes it easier to find the customers who have the most impact on your revenue. This leads to better strategies, because you can make more effective decisions when you know what each customer is bringing to your business.

Customer value is also important because it gives you what you need to segment customers by their purchasing habits. Segment insights help you create more targeted, customized experiences for your top customers.

Customer Value Challenges

• Data sources must be reliable, properly integrated, and accurately reflect the monetary value of each customer
• Estimating customer lifespan can be difficult as many businesses have a wide range of customer retention rates.
• Factors such as brand loyalty and referrals can be difficult to calculate. So, you may need extra qualitative and quantitative data to calculate customer value.

Tips for Calculating Customer Value

• Implement a CRM to confirm data accuracy
• Create a consistent process for assigning monetary value to each customer based on their transaction history
• Combine financial systems with customer data to show the monetary value of each customer, like these finance integrations
• Watch customer feedback and sentiment through reviews and social listening to add it to customer value calculations

To calculate average customer lifespan:

First, figure out the average number of years a customer stays active with your company. Once you have your customer lifespan, you'll divide that by your total customer base to get the average.

You'll need excellent data management for this figure, and make sure you don't have duplicate accounts in your data.

Average customer lifespan is useful when calculating CLV. This is because it supports predictions on how long customer relationships will last with data. This helps you make more informed budgeting and resourcing decisions.

It can also help you:

• Launch proactive strategies to build customer relationships and reduce churn
• Figure out the ROI for customer acquisition
• Optimize marketing strategies
• Find acquisition channels with higher CLV potential

Average Customer Lifespan Challenges

Calculating average customer lifespan can be tough because:

• Accurate customer lifecycle tracking needs a robust data management system
• Different customer segments and subgroups can skew lifespan predictions
• Limited customer data or short relationships lead to projections that don't align with actual customer behavior

Tips for Calculating Average Customer Lifespan

• Use reliable customer service software to track the customer lifecycle
• Include data from different sources and platforms to create a full view of the customer journey
• Capture and analyze data at each stage of the buyer journey to track engagement and retention
• Analyze the average lifespan of each customer segment individually to limit skewed results
• Conduct regular trend analysis to predict shifts or changes that may impact lifespan
• Gather data on customer satisfaction and loyalty
• Constantly confirm and adjust lifespan average based on actual customer behavior and feedback

Customer acquisition cost is not a factor in most CLV formulas, but it can be useful to include in a customer lifetime value analysis.

Comparing how much it costs to acquire a customer with their lifetime value to the business, you can figure out how to:

• Decide how effective marketing and sales strategies are
• Distribute resources wisely
• Find fitting opportunities to improve customer retention and acquisition

Check out this guide to learn more about customer acquisition cost (CAC) and how to calculate. Then, review these tips for analyzing your CAC to LTV ratio .

Using data from a Kissmetrics report, we can take Starbucks as an example for determining CLTV.

Its report measures the weekly purchasing habits of five customers, then averages their total values together.

Follow Along with HubSpot's CLV Calculator Template

As you scale it can become more difficult to personalize. But with tools like HubSpot Service Hub , you can create personalized onboarding workflows to guide customers through the necessary steps. This custom experience can help them quickly understand your product or service and get value from it quickly.

Streamline onboarding with useful tools.

Use a knowledge base or live chat to help simplify onboarding. These features help customers easily find information and get quick support whenever they need it.

Collect customer feedback through surveys.

Connect after onboarding to get insights on their onboarding experience and find areas you can improve the customer experience with feedback .

Track key onboarding KPIs.

Collect and analyze service metrics such as customer activation rate, time to first interaction, customer retention rate, and repeat purchase rate. This data can help you enhance your onboarding process for increased CLV.

Why This Works

Optimized onboarding processes work because they establish a framework for long-term customer relationships that help increase CLV over time.

Free Customer Onboarding Templates

Eight templates to lead your new customers through their first several months with your product or service

• Customer Intake Form Template
• Customizable Welcome Packet
• Onboarding Timeline Template

2. Increase your average order value.

One of the smartest ways to improve your CLV is to increase your average order value.

When a customer is about to check out, you can offer relevant complementary products to those they're about to buy.

Get inspired by these upsell and cross-sell examples.

Brands like Amazon and McDonald's are examples of companies that use upsell and cross-sell methods extremely well.

Amazon will offer you related products and bundle them into a group price as depicted below.

A ticketing system isn't just helpful for customer problem-solving. It can help you provide prompt and consistent support and engagement where your customers are. This is critical for building trust and mutual satisfaction.

Share authentic and relatable content.

Get genuine and go beyond canned advertising posts. Tell stories, share behind-the-scenes moments, and encourage user-generated content to build community.

Host interactive events or challenges.

You may not be able to connect with every customer in person. But you can encourage active participation and build connections with online events. This guide to running virtual events can help you get started.

This works because you need to stand out from the crowd. Quick and easy eCommerce is now par for the course — if you can forge an actual connection with customers you'll keep them coming back and increase your total CLV.

4. Embrace good advice.

Sometimes it's better to listen than talk.

Customers often have good advice on how you could improve business practices to better serve their needs — and you can increase CLV by taking it.

To make the most of advice from your customers:

Analyze and rank customer suggestions.

For example, you could create a poll on new product or service ideas and see what your customer base thinks. Make sure you don't lock them into a specific set of choices. Instead, give them room to add their own ideas that could help make things better.

And don't stop at surveys. You can collect reviews, social media, and customer support interactions too. Then, review this feedback for common themes and to prioritize what you want to improve.

HubSpot's customer feedback tools make it easy to seek input and suggestions from your customers. While not every customer will engage, those who do will often have good advice and can end up being some of your most loyal customers.

Loop in relevant stakeholders for decision-making processes.

Bring in stakeholders from different departments to review, discuss, and evaluate customer feedback. Not every suggestion will be realistic for your business. But the more you can honor the needs of your customers, the more likely you are to boost CLV.

Service Hub's collaboration and team management features streamline knowledge sharing. This encourages internal collaboration.

Communicate changes you've made based on customer advice.

Give credit where credit is due. If a customer comes up with a good idea, credit them for the help. You may also want to consider sending them something as a token of appreciation.

This works because it shows you're willing to listen. Too many brands take the stance that they know what their customers want better than customers themselves, which in turn can lower total CLV.

5. Empower easy connections.

Customers won't wait around for your brand to connect with them or answer their questions. 2023 HubSpot data says that 66% of consumers want a response to emails from customer service in five minutes or less .

While this isn't always possible, businesses can put practices in place to shorten response times and empower easy connections.

Use technology such as chatbots or automated support systems.

When you can, offer instant responses to common customer queries. Tools like live chat , chatbots , and email integrations can help streamline the connection process. They can also offer immediate assistance to meet high customer expectations.

Create self-service resources and knowledge bases.

Make it simple for customers to find answers to their questions independently. You can accomplish this with a knowledge base , customer portal , and other self-serve resources . This empowers them to find information quickly. It also reduces the need for direct interactions while creating a connection.

Be proactive on customer feedback channels.

Equip your customer success team with tools and technology to monitor and respond to customer comments or concerns through different channels, such as social media and online reviews. This can help your brand jumpstart the connection process.

CLV is now driven by relationships and relationships require an ongoing connection.

While five-minute email response times may be out of reach, the easier you make it for customers to connect with your brand the more connected they'll feel overall.

And the more likely they'll come back to spend more money.

6. Improve your customer service.

According to 2023 HubSpot research, 93% of customers are likely to make repeat purchases with companies that offer excellent customer service.

So if you want to improve your customer lifetime value, you should pay attention to your customer service and look for ways to make it excellent.

Here are just a few ways you can improve your customer service:

Use omni-channel customer support.

Make sure your customer support experience is seamless and consistent. To do this, offer support across multiple channels, such as phone, email, live chat, and social media platforms. This makes it easy for customers to reach out through their preferred channel.

HubSpot's service automation features can help you automate support tasks. When you reduce manual outreach, like routine emails, it gives you more time to focus on resolving complex issues. This can help your team offer higher-quality service to your customers.

Add personalized services.

Use customer data insights to personalize the experience for each customer. This information can help your team make custom recommendations, offers, and product suggestions.

Offer a proper return and refund policy.

Create a clear and fair return or refund policy that shows your commitment to customer satisfaction. Keep in mind, any great refund or return process should be hassle-free.

Enhance customer service training.

Make sure your business has a training program in place. Great service training should educate employees on your products, best practices, and problem-solving. Training should also include active listening, empathy, and effective communication techniques.

Add customer service feedback systems.

Sending customer surveys is a great idea, but it won't help much if you don't have a process in place to analyze your data. Create processes to review customer feedback regularly. This can help you notice patterns or trends and address any recurring issues.

It's simple: The better your customer service the more customers feel valued by your brand for more than their purchases.

If you stand behind your products with substantive return and refund policies, it communicates to customers that your priority is quality and satisfaction, not overall sales volume.

The result? Increased CLV.

The Benefit of Customer Lifetime Value

Customer lifetime value is an incredibly useful metric. Once you know how to calculate lifetime value, you'll know which customers spend the most at your business and which ones will remain loyal to you for the longest amount of time.

Use the formulas and model provided above and start calculating CLTV for your business today.

Editor's note: This post was originally published in May 2021 and has been updated for comprehensiveness.

Don't forget to share this post!

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Customer Lifetime Value: What It Is and Why It Matters

• Make more purchases consistently over time
• Refer other customers to a business
• Impact company sentiment through brand advocacy on channels such as social media
• Cost less to retain and build relationships with than new customers

According to Ali Cudby , a customer retention researcher and author, it costs six-to-seven-times more to acquire a new customer than it does to retain current customers. Cudby notes that a 5% increase in retention can lead to improved profitability of 25% or more, and potentially a 95% increase in profits. 

Learn what customer lifetime value is, why it matters and how to use it to promote customer loyalty and potentially increase profits.

Identifying Target Customers 

One way a business can identify target customers on which to focus is to estimate customer lifetime value. This business metric can drive everything from a company’s marketing strategy, to sales techniques, to product and service development. 

What Is Customer Lifetime Value?

Put simply, customer lifetime value represents how much a customer is expected to spend with a company from their first to last purchase with the business.

For example, say the average customer with a skincare and beauty brand spends an average of $250 a year with the brand beginning when they’re around 25 years old. They’re expected to purchase regularly from the brand until they’re around 60 years old. That means, the average customer would spend $8,750 with that brand over their lifetime.

A customer who subscribes to the company’s email newsletter, for example, may spend $600 a year with the brand, which notably increases their customer lifetime value to $21,000. 

A customer who has a bad experience with product shipment, for example, may abandon the brand a year into spending with them, which diminishes their customer lifetime value.

Factors that can impact customer lifetime value

Factors that can impact a customer’s lifetime value, include how:

• Engaged a customer is with the brand
• Much value of the products they regularly purchase from the brand
• Frequently they purchase

Companies that strategize how to increase the customer lifetime value of their most valuable customers and find ways to turn casual customers into more valuable customers, can increase their revenue. 

Why Is Customer Lifetime Value Important?

Customer lifetime value matters because it helps businesses better understand their current customer base and who they should target to maximize profits. 

According to research by the Wharton School’s Professor of Marketing David Reibstein , the probability of selling to an existing customer is up to 14 times higher than the likelihood of selling to a new customer. 

Applying Best Practices

Because it’s more difficult and expensive to gain a new customer compared to keeping an existing customer, companies that focus on increasing the customer lifetime value of each one of their customers can boost their results while lowering costs. 

When a business understands the customer lifetime value of various personas within their customer base, they can apply best practices from the most valuable group to other groups, as well as to new customers. 

How to Estimate the Value of a Single Customer

A basic customer lifetime value formula is:

Customer lifetime value = Customer value x average customer lifespan

For the customer value and average customer lifespan components, you may want to calculate averages for each one. For example, out of a customer pool of 100 customers, you may find the average value is $100/year with an average customer lifespan of 10 years. 

Looking at the average customer value

You could get more granular with your calculations, but looking at the average customer value for those who spend 10 years with a company, versus those who spend 15 years with a company. 

To illustrate, referencing the skincare company example above, the business might segment their customer base into various personas that have various customer lifetime values. 

For example, customers who start buying from the company:

• In their 20s may make more of their early purchases in the less expensive makeup category for their first decade with the company before adding products to their shopping cart. 
• In their 40s may be more apt to purchase more expensive skincare items at the beginning of their customer journey. 

Loyalty rewards programs

A business may also compare the customer lifetime value of people who are members of a brand’s loyalty rewards program versus those who are not. Using customer lifetime value figures, the company can strategize how to get more non-members into the club, and how to provide more value to club members to keep them engaged. 

How you determine various customer lifetime values will depend on the variety within your customer base. That’s why it’s helpful to look at different buyer personas, so you can get a clearer view of the customer lifetime value of each one. Then, you can strategize how to increase that value across the business.

How to Increase Customer Lifetime Value

There are several ways to increase the customer lifetime value across a company’s customer base. These include:

• Increase the average purchase value . This can be done by promoting products that are relevant to a persona at checkout, sending offers for new or limited-edition items, suggestive selling in stores, and other sales and marketing methods. A company may also decide to invest in new service or product development for other products that provide value to engaged customers.
• Increase the average purchase frequency rate . Another way to boost customer lifetime value is to motivate existing customers to purchase more frequently. For a coffee shop, this might look like opening more locations in a high-sales area, or extending the open-close hours for each location. For an ecommerce brand, it might result from sending more frequent email communications or releasing more offer codes on social media.
• Increase the value of products and services sold . It’s easier to sell higher-value products and services to people who already trust in your brand. You can increase the average purchase value by creating products and services that are more valuable and, thus, come with a higher price tag.
• Increase the average customer lifespan . Another strategy to keep customers buying from you over a longer period of time is to understand when customers tend to stop purchasing and for what reason. For example, a clothing company that’s marketed to those in their 20s may see that customers quit buying from them in their 30s. The brand may explore creating a new fashion line or brand that’s geared toward customers in this age group. 

Map the customer journey for each persona

These strategies will only work if you create strong brand-consumer relationships to begin with. That’s why it’s important to map out the customer journey for each persona, so you can identify pain points along the journey and offer proactive service every step of the way. This helps prevent customer drop-off, so customers stay loyal to the brand. 

Learn More About Managing the Value of Customer Relationships

If digital marketing topics like customer lifetime value interest you, learn more in the Managing the Value of Customer Relationships course from Wharton School, part of the Digital Marketing Certificate Program . The course teaches how to make informed decisions for customer-centric strategies and how to choose the right metrics to guide them. 

Discover other in-demand digital marketing skills that can help you grow your career. Contact us for information on our school programs and certificates, and we’ll get in touch with you.

The Wharton School is accredited by the International Association for Continuing Education and Training (IACET) and is authorized to issue the IACET CEU.

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What Is Customer Lifetime Value (LTV) and How to Calculate It? The Ultimate Guide

By Samuel Kellett

Table of Contents

What Is Customer Lifetime Value (LTV)?

What is the difference between clv and ltv, why is customer lifetime value important, how to calculate customer lifetime value (with examples), how to increase your customer lifetime value, how to use customer lifetime value and increase profitability, what is the relationship between cac and customer lifetime value, how clv can drive business kpis (interview), why don’t more companies use customer lifetime value effectively, calculate and maximize your clv with bloomreach engagement.

The importance of customer lifetime value (also called CLV, CLTV, LCV, or LTV marketing) has been understated for a long time. And more often than not, it's the most important metric that companies ignore.

Marketers have been writing about how important knowing CLV and LTV is for years, but it’s still being ignored or underutilized: only 42% of companies are actually able to accurately measure CLV. This is despite the fact that 89% agree that CLV and a great customer experience are crucial for driving brand loyalty.

• CLV is simply defined as the value a customer represents to a company over a period of time.
• CLV can be calculated by multiplying the average annual profit of a customer by the average duration of customer retention.
• Customer lifetime value is important because it informs how much your company can/should spend on customer acquisition.

Customer Lifetime Value (CLV or CLTV) is a pivotal metric, offering insights into the anticipated total revenue a business can derive from a single customer account over the course of their entire relationship. This metric takes into account the revenue generated by a customer and aligns it with the anticipated duration of the business relationship.You can calculate a simple customer lifetime value model for your company with this formula:

There are other methods of calculating customer lifetime value that get much deeper and can focus on the average customer or an individual customer. To illustrate this, this article is going to cover the importance of CLV, a customer lifetime value formula you can use to find it, and the actionable ways you can use it to measure customer lifetime and improve your business.

CLV and LTV are both used as shorthand for customer lifetime value, and they essentially share the same meaning. There’s no industry-established difference between the terms and marketers often use them interchangeably.

Some people differentiate between CLV and LTV in terms of specificity, with CLV identifying the value of an individual customer over their entire relationship with a brand and LTV referring to the average customer lifetime value of all existing customers .

But without company-specific factors for any one business’ calculations, this small degree of differentiation essentially produces the same metric, which is why the terms are understood to be identical.

Customer lifetime value calculations will get you one answer, but the knowledge you gain can be applied in a multitude of ways:

It Informs How Much You Should Spend on Customer Acquisition

Your customer acquisition costs (CAC) may very well equal more than you make from a customer's first purchase. But that doesn't take into account the average customer lifespan — are you still making money from that customer in the long run?

Figuring out the average lifetime value of a customer to your company will give you the answer.

It Allows You To Segment Your Customers Based on Value

"Using CLV, you can better understand the different personas among your customers — the first step to effective targeting or personalization."

Daniar Rusnak | Bloomreach Academy, Senior Trainer

Calculating your CLV allows you to narrow your marketing focus for more effective campaigns. When you know how valuable a customer is in the long term, you can create better interactions with your high-value customers and foster more meaningful engagement.

You can send a special offer or gift to your “VIP” customers, or focus on acquiring new customers with similar backgrounds. You can also nurture less valuable customers and start upselling to build a high customer lifetime value. Viewing your audience through customer segments allows for a personalized experience — which is key to keep your customer retention rates high.

Focusing on CLV Is Key for Long-Term Company-Wide Growth

It’s a competitive market for ecommerce companies, and price isn’t the only determining factor in a customer’s decisions.

CLV is a customer-centric metric, and one that depends on giving your audience a great customer experience . It's a powerful base metric to build upon to retain customers, increase revenue from less valuable customers, and improve the customer experience overall.

The Process of Finding Your CLV Is Valuable

"The advantage of determining customer lifetime value is not just the final number itself, but also the thinking and calculation behind the metric."

Lukas Sitar | Inbound Marketing Specialist

Determining your business' CLV or LTV provides more than one statistic. The process of finding your customer lifetime value will make you think — not just about the sale, but about the full customer journey: when, where, why, for how much, and how often do your customers make a purchase?

Answering these questions will bring valuable insights, lay out clear ways to strengthen your customer journeys, and help you spot issues in your customer engagement plan that you may not have noticed before.

There are four KPIs that determine your LTV: average order value (AOV), purchase frequency (F), gross margin (GM) and churn rate (CR).

With all these metrics, you can use this formula to calculate customer lifetime value:

With this customer lifetime value model, all you need to do is break down the equation to identify each factor and plug them all in to the formula.

It’s important to look at each of these KPIs individually and determine their individual values before plugging them into the equation. This will help determine which one needs the most work in terms of profit maximization.

How to Calculate Your Average Order Value (AOV)

First, we need to calculate your AOV using this equation:

AOV = Total Sales Revenue / Total Number of Orders

Let's walk through an example computation of Company A's average order value:

AVERAGE ORDER VALUE ANALYSIS: COMPANY A

Total Sales Revenue (annual): $1,000,000 Total Number of Orders (annual): 40,000 1,000,000 / 40,000 = 25 Company A has an average order value of $25

How to Calculate Your Purchase Frequency (F)

Next, you need to calculate your purchase frequency, or the number of times a customer completes a purchase in a given period of time:

F = Total Number of Orders / Total Number of Unique Customers

Let's continue our example to find Company A's purchase frequency:

PURCHASE FREQUENCY ANALYSIS: COMPANY A

Total Number of Orders (annual): 40,000 Total Number of Unique Customers (annual): 15,000 40,000 / 15,000 = 2.67 Company A has a purchase frequency of 2.67

How to Calculate Your Gross Margin (GM)

Now you need your gross margin — a business’ profit percentage after subtracting all direct costs of producing or purchasing the goods or services it sells.

GM = Total Sales Revenue – Cost of Goods Sold (COGS) / Total Sales Revenue

To calculate your gross margin, you need to start by calculating the cost of goods sold (COGS) using this equation:

COGS = beginning inventory (inventory left from last year) + additional purchases during period cost – ending inventory (inventory left at the end of the year)

Here's a walkthrough of these calculations using our Company A example:

GROSS MARGIN ANALYSIS: COMPANY A

Beginning Inventory: $180,000 Additional Purchases During Period: $450,000 Ending Inventory: $160,000 180,000 + 450,000 – 160,000 = 470,000 Company A has a Cost of Goods Sold of $470,000

Total Sales Revenue: $800,000 COGS: $470,000 800,000 – 470,000 / 800,000 = 0.41 Company A has a gross margin of 41%

How to Calculate Customer Lifetime Period (1/Churn)

Now it's time to identify your customer lifetime period. To do so, you first need to find your churn rate, or the number of customers who stop doing business with a company during a given period.

Churn Rate = (# of Customers at End of Time Period – # of Customers at Beginning of Time Period) / # of Customers at Beginning of Time Period

Once you calculate your churn rate percentage, you can determine your customer lifetime period.

You can plug your rate into the equation below or consult our corresponding chart to find your average customer lifetime period:

Customer Lifetime Period = 1/Churn Rate

Plugging All Your KPIs Into the Customer Lifetime Value Model

Now that we have all the factors needed, we can plug them all into the customer lifetime value formula. Here's how the formula gets solved for our Company A example:

CUSTOMER LIFETIME VALUE ANALYSIS: COMPANY A

Average Order Value: $25 Average Purchase Frequency: 2.67 Gross Margin: 41% Churn Rate: 60% -> Customer Lifetime Period: 1,67

25 (AOV) * 2.67 (F) * 0.41 (GM) * (1/0.6) = $45.7 Customer Lifetime Value is $45.7 (per customer)

With our KPIs ready, it’s time to work on our customer value maximization. But which of your KPIs are strong, and which ones need improvement? What is a good profit margin? What is a good purchase frequency?

Compare your KPIs with industry benchmarks to determine which KPI needs the most improvement. It's important to take your industry into account because a good retail profit margin wouldn’t necessarily be a good food services profit margin.

Find current averages for your specific industry, then get to work on reaching — and surpassing — the standard metrics. Which one could improve customer value the most? Remember to focus on your weakest KPI first in order to maximize profit.

How To Improve Your Average Order Value (AOV)

Having trouble getting your customers to increase their spending? Try these campaigns, which focus on providing incentives to increase AOV.

• Add personalized product recommendations to your site. The recommended products should be based on the ideal price point for each individual customer, thereby maximizing revenue.
• Send personalized newsletter campaigns to customers with dynamic product recommendations optimized for price.
• Set up triggered product recommendations for customers based on what they’ve added to their shopping cart, directly on your website.
• Send an abandoned cart email campaign with product recommendations based on what they’ve added to their shopping cart.
• Create product bundles that offer a discount for making a larger purchase. Bundle products that can be used together and recommend the bundle directly on the site, or through email, based off the user’s browsing and shopping cart history.
• Create a customer loyalty program incentivizing spending by adding loyalty points that customers can use for discounts and freebies.

How To Improve Your Purchase Frequency (F)

Maybe your customers spend a lot and you’re making a great margin, but they just don’t order very often. Try a few of these campaigns to maximize profit by nurturing long-term customer relationships.

• Communicate dynamically and send emails at the ideal time for each customer — which you can effortlessly achieve with a truly unified single customer view (SCV) .
• Test and analyze your communications to figure out if you’re communicating through the right channels. Does this particular customer respond better to email or SMS? Make sure target customers receive your message through their preferred channel.
• Segment your customers by their customer lifecycle stage , then reengage with existing customers who haven’t purchased recently and are in danger of churning.
• Use push notifications and banners to highlight time-sensitive deals based off a customer's browsing history.
• Use banners that trigger when a customer enters and exits the site to recommend personalized products or sales.

How To Improve Your Gross Margin (GM)

It doesn’t matter how valuable your orders are or how frequently they happen if your gross margin doesn’t allow for a profit from the sales. Here are some ideas for profit improvement through increasing the average revenue you make on the sale.

• Use an inventory manager to make better estimates for what you’ll need to resupply your stock for the next year.
• Sell higher margin products . This is an easy way to maximize profit margins, and you can adjust your recommendation models to exclude products that are hurting your margins.
• Use a price optimizer to automatically find the ideal selling price for each of your products based on where they are in the product lifecycle. This will keep you informed of any products with more room for profit maximization.
• Strive to sell leftover products from the previous year to reduce your cost of goods sold.

How To Improve Your Churn Rate (Customer Lifetime Period)

Churn is a very complex metric, and there are many factors that combine to cause a customer to churn from your business. To decrease churn, you need to mainly focus on customer loyalty. Create incredible shopping experiences and your customers will stay with you.

• Set up reengagement campaigns that offer incentives and value for repeat customers.
• Create personalized email campaigns that utilize historical data to speak directly to customers' wants and needs.
• Build a customer loyalty program encouraging spending with points and perks that loyal customers can use for discounts and freebies.
• Provide more ways for customers to engage with your brand by employing an omnichannel commerce strategy , offering seamless communication across channels and elevating customer experience.

In order to get the most out of your CLV, there are some fundamental capabilities your business must have in your martech stack:

• Access to all your customer data in one place
• A unifying dashboard for communicating with customers on all channels
• Predictive analytics capabilities
• The ability to monitor your data streams and communication channels

Thankfully, marketing technology has evolved to meet all these needs and help businesses optimize their customer relationships. And with the rapid rise of artificial intelligence , your marketing team can easily organize, manage, and activate all your data.

Harness AI To Streamline Your CLV Strategy

AI gives you the ability to handle complex data analysis, intelligent marketing automation, and generate content based on a customer’s past interactions with your brand — all without burdening your marketing team with a massive amount of data to comb through and rules to create for certain customer segments.

AI tools are quickly becoming an essential component of a successful ecommerce strategy, and adopting this revolutionary tech gives you all the capabilities necessary to calculate CLV and reach its full potential.

Read This Next: What Is Generative AI? Everything You Need To Know

Once all your fundamental features are in place, there are numerous actionable uses for your customer lifetime value formula. Using CLV effectively can improve customer acquisition and customer retention, prevent churn, help you plan your marketing budget, measure the performance of your ads in more detail, and much more.

Here are a few of our favorite ways to use CLV:

Acquire High-value Customers

Once you’ve performed a CLV analysis on all your current customers, you’ll know how much you should spend on acquisition . You’ll also know which acquisition channels produce the highest-value customers, and can repeat the strategies you used to find them.

Secure Future VIPs

With a solid data profile of what characteristics your VIPs have, you can use predictive analytics to get a strong idea of which new customers will likely be future VIPs , and focus on these customers with personalized messaging and offers. You can also make use of a look-alike model, as was mentioned in the first section, to target similar profiles.

Practice Value-tier Segmentation

As we touched on in the beginning of this blog, CLV makes it possible to identify which customers are VIPs and which are lower value. Once you separate your customers into different value tiers, you can see where your profits are really coming from. Look at your VIPs, specifically the 5% on top: How much of your total revenue is provided by just this 5% of your customer base?

With defined levels of customer value, you can then focus on converting loyal customers from their current tier to a higher one.

Prevent Churn

Now that you now know the average order value and purchase frequency of your customers, it's possible to craft personalized messaging and send the right offer to the right person at the right time.

Find Your Weak Point and Strengthen It

The insights gained from calculating your CLV will show you which of your company's KPIs need improvement — you’ll be able to see which area you most need to invest your time and money into.

Plan Your Yearly Advertising Budget

If you know your CLV, you can determine how much you can spend on customer acquisition while remaining profitable. This, in turn, allows you to accurately determine how much you’ll need to spend on advertising.

Measure Your Ad Performance

Without CLV, you’re inevitably defining a customer's value by the profit from their first purchase. But using that number to tell you which customer is more valuable is short-sighted.

Using that logic, if Jim spent $6 and Billy spent $15, Billy is the kind of customer you care about. But after measuring for CLV, you may find that Jim makes multiple purchases a month, while Billy is never seen again.

With your customer lifetime value model in mind, that scenario tells you everything you need to know about your ad spend. You know that the ads you invested in acquiring Jim can actually create more value than the ones that acquired Billy. Scale that with the data of all your customers, and you get the full picture of which ads are most effective for your business.

Understanding customer lifetime value is critical in its own right. But it is also one half of an important relationship for businesses to understand — the correlation between LTV and CAC.

Luckily, this correlation is easy to comprehend. Simply put, if you want to know if your ecommerce business is in good shape, your customer acquisition cost needs to be lower than your customer lifetime value .

What Is Customer Acquisition Cost and Why Does It Matter?

CAC measures how much a company spends to acquire new customers. It defines how much money is needed to convince a customer to buy a business' product or service.

It's easy to see why CAC is a crucial metric. You need to know how much your business can spend to acquire enough customers without spending more than the value those customers will bring to your company.

We've covered CAC before in our in-depth blog , but the metric boils down to a simple ratio:

CAC = All Costs Spent on Acquiring Customers in a Given Period / the # of Customers Acquired in That Same Period

Comparing this metric to your customer lifetime value is one of the most vital relationships a business needs to keep under control — it will tell you whether or not your business can succeed. If your CAC is higher than your customer lifetime value, then your business is in serious trouble.

The bottom line is you always want to reduce your CAC as much as possible, while also increasing your customer lifetime value.

Bloomreach clients like Desigual use customer lifetime value to drive critical KPIs for their business. We sat down with Ricardo Gómez, Global Head of 365 Consumer Marketing at Desigual, to understand how Desigual improves its CLV.

BLOOMREACH: What is more important for Desigual: lowering customer acquisition cost or increasing customer lifetime value?

RICARDO: For us, increasing CLV is what matters the most. Our CAC is quite low compared to the business our customers bring to the brand. The biggest acquisitions we do are done when our customers buy and we invite them to join our members program. This is why we have to ensure we’re driving traffic to the stores and increasing the CLV of our database.

BLOOMREACH : What have you found to be the most challenging part of increasing your customers’ lifetime value?

RICARDO: Our CLV is very closely linked to the overall experience we offer and to the quality of the products we sell. Therefore, we largely increase our CLV by making sure there are no pain points — or if there are, that we address them quickly. We also do not send campaigns for products that have had or could have any quality issues.

Omnichannel campaigns are important too; we run several campaigns to move clients who shop offline only to buy online as well. This has a great impact for us.

Finally, we found a correlation between lowered customer value and lower-quality purchased products, so we stopped communications around those items and began to remove the garments we believed to be below our standards.

With so many benefits and insights to be gained with customer lifetime value models, it's hard to believe that not every business utilizes the formula to its full potential. Here's some of the biggest roadblocks that companies face when trying to take advantage of CLV.

Many Established Companies Keep Their Data in Different Silos

As companies grow, it’s common for their data to become fractured. Different pieces are kept in separate places, and often accessed by different software, as each department pursues its own goals.

This makes collaboration between departments and proper business analysis difficult, commonly resulting in less trustworthy data. If the same information is stored in two places without an effective timestamp to show which is more current, data silos are likely hindering your company’s efforts.

These data silos are detrimental to calculating CLV. Without up-to-date data in one unified and organized place, you aren’t making use of the wealth of information you’re collecting, and your calculations are doomed to be inaccurate. Siloed data is the biggest issue facing modern businesses looking to scale their marketing, and it’s why only 24% of companies believe they are monitoring CLV effectively.

Read This Next: A Single Customer view: Everything you Need To Know

Customers Now Make Purchases From Multiple Devices

With the same customer making purchases from their computer, phone, and tablet, many companies have difficulty combining all their data streams into one measurable whole. Attempting to extract meaningful insight from these separate streams can be both expensive and inefficient. Companies without a main dashboard synthesizing all their customer data in one place will find themselves increasingly left behind.

Companies Lack In-House Skills and AI Technology

Many companies who have not yet begun tracking CLV are dealing with a lack of qualified personnel to follow the data and produce actionable plans based on it. This, coupled with the need for an in-house dashboard for that qualified personnel to use, creates a strong barrier to entry.

Luckily, the rapid evolution of marketing AI tools can help businesses organize and manage all their data without overwhelming marketing teams with tedious tasks.

Today’s marketers, data scientists, executives, and business professionals now have a powerful tool to help them determine and utilize customer lifetime value: a customer data platform. A CDP serves as a central hub for all your customer data, collecting it into individual profiles for each customer.

CDP capabilities are essential for calculating CLV, which is why Bloomreach Engagement offers all the key components you need to calculate customer lifetime value, apply it to your marketing efforts, and so much more.

Bloomreach Engagement is an all-in-one platform that helps marketers create personalized campaigns for every customer. Our solution combines the power of a customer data platform with the speed and scale of AI, helping you reach customers where and when it matters most.

It’s designed to impact every phase of your customer journey, providing a single marketing view of real-time customer data, campaign automation across 13 channels, and analytics that make it easy to grow your brand and your revenue — fast.

Learn more about the importance of understanding customer lifetime value by checking our CAC/LTV calculator . If you're looking to reduce your customer acquisition costs while simultaneously increasing your customer lifetime value, our calculator will give you a precise calculation to begin your pursuits.

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Samuel Kellett

Head of Content

Sam leads the content team at Bloomreach, where he manages the production of ecommerce articles and case studies, as well as the content for webinars and events. With his background in screenwriting and theatre, Sam brings a unique perspective to his role as Bloomreach’s head of content. Sam’s passion is storytelling: he is constantly exploring new and creative ways to explain complex topics.

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What is Customer Lifetime Value (CLV)? Definition & Formulas

Unlock the secrets of your most lucrative users through customer lifetime value calculations.

At the surface, it’s a simple idea: Customer lifetime value (CLV) is the monetary worth of a customer to your business for the length of their patronage. However, digging deeper into CLV reveals layers of complexity that speak to how essential the concept is to the continued success of your product.

A customer’s lifetime value is tied both to a customer’s satisfaction with a product and a company’s ability to retain frequent users. Calculating the lifetime value of a customer serves as an evaluation of your current sales and efforts. By establishing this baseline, you can plan for improvements in the customer journey that lead to cost savings and revenue increases down the line.

• Customer lifetime value (CLV) is the measurement of how a customer’s worth for as long as they do business with a company.
• Measuring CLV helps fuel marketing efforts, enhance audience targeting, and reduce churn.
• Personalization and friction reduction measures can improve CLV.

Why Customer Lifetime Value Matters to Your Business

If every one of your customers behaved in the same manner and spent the same amount of money at all times, their value to your business would be the same. This, of course, is not the case, meaning a certain percentage of your customers are responsible for more of your revenue than others.

You can use CLV to calculate how much existing customers stand to spend on your product. By doing so, you can better project how much each new acquisition is likely to invest over the course of their life cycle. Additionally, the ability to identify high CLV customer behaviors is vital in understanding how to encourage said behaviors in lower CLV groups.

Real-World Applications of Customer Lifetime Value

Analyzing marketing campaign success.

Marketers can use this figure to measure marketing campaign successes. Imagine you discover that the average customer spends $400 on your product over the course of their life cycle. Sales-wise, this number may be acceptable or even exciting. However, if the marketing costs to convert each customer averages around $390, you’ll need to go back to the drawing board to determine how to reduce acquisition costs or boost sales.

A dream marketing campaign would bring prospects into the fold in droves at the cost of only pennies. This simply isn’t realistic. However, quantifying CLV will help you determine the upper limits of acceptable acquisition costs or identify which marketing strategies are wildly successful compared to an acquisition’s assumed revenue.

Improving Audience Targeting

Calculating the lifetime value of your customers helps identify how the most lucrative ones use your product. Studying customers with high CLV will likely reveal a segment of users spending money on your product over time. You may discover that your highest value customers are those who spend a great deal in a short time or ones who spend less money but have used your product steadily for years.

The money a customer spends on your product isn’t the only way to measure value. Your product analytics are likely to reveal that users who are more engaged with your product are more likely to leave good reviews, share experiences on social media, or refer your product directly to peers. This customer may not spend heavily on your product, but they are invaluable as vocal advocates.

Opportunities for upselling or long-term renewal give you a more complete picture of the value of your customers. Perhaps your video conferencing platform is only used by a single team at a large company on a trial basis. The team may not be spending an impressive sum currently, but the potential for widespread adoption and future investment in your product make them highly valuable customers.

Identifying high-CLV customers should reveal similarities in demographics and behaviors. You can build campaigns or messaging focused on targeting certain demos or encouraging specific behaviors to convert lower-value customers into bigger spenders.

For example, imagine your research reveals customers who use your wish list feature at least three times are 50% more likely to join the upper echelons of high-value customers. Your next marketing campaign should target existing low-engagement customers with messaging highlighting the benefits of your wish list feature.

Identifying Points of Frustration

Alternatively, studying your lower-CLV customers may reveal patterns into what obstacles hinder your user experience. Research has shown that customers are willing to spend as much as 16% more for products and services that offer a great customer experience .

Parsing through the analytics data for your lower-value customers might reveal friction at the critical sign-up event for your product’s premium feature. Removing the causes of churn or disengagement helps your users develop a better relationship with the product itself—and a willingness to spend more for that relationship.

Boosted Revenue Through Observation

Simply keeping an eye on your product’s CLV may prove to drive revenue in and of itself. A 2018 Criteo survey determined 81% of marketers believed that keeping tabs on their CLV resulted in increased sales.

It’s possible that the benefits are the result of the Hawthorne effect in action and that emphasis on tracking CLV resulted in greater effort from the marketers themselves. Either way, you’re not likely to quibble over the true cause of added revenue as you count your extra money.

How to Calculate Customer Lifetime Value

Customer lifetime value analysis has undeniable value, but how do you do it? Different variations of the CLV formula exist, but distilled down to its purest form, it looks like this:

CLV = Average Customer Lifespan x Customer Value

Firstly, you’ll need a sense of your average customer lifespan . This figure is usually expressed in years, though products with higher churn rates may prefer to measure it in months.

Determining customer value (CV) requires a bit more math. The calculation for customer value is:

CV = Average Purchase Frequency x Average Purchase Value

Both of the expressions contained within this equation are exactly what they sound like. Average purchase frequency is the mean number of times a customer spends money on or within your product over the course of a predetermined time period. Average purchase value is the mean monetary cost of these purchases over that same time period.

CV and CLV have one one key difference: CV calculates the value for a limited time frame, while CLV determines the value of a customer from “hello” to “goodbye.” Take customers who buy from your hypothetical ecommerce website. The average customer makes 100 purchases a year, with each purchase clocking in at $10 a transaction. This means your CV is $1,000.

Your most dedicated customers have been purchasing from your business since its inception 10 years ago. At $1,000 a year, their CLV is $10,000 and growing. On average, however, customers tend to churn after three years, making your average CLV $3,000.

How (and Why) to Calculate Customer Acquisition Cost (CAC)

Measuring CLV in a vacuum doesn’t factor in how much money it takes to acquire these customers in the first place. You may be excited to discover that your average customer brings in $3,000 on average, but you’re bound to be less enthused if it costs $3,300 to bring them into the fold.

Finding your customer acquisition cost (CAC) helps define how much it takes to bring a customer into the fold. It’s a simple calculation:

CAC = Total Acquisition Costs / Number of Acquisitions

Both acquisition costs and the number of acquisitions should be pulled from the same time span as that of your CV measurement for an apples-to-apples comparison of cost to value. Subtracting your CAC from your CLV will give you a more realistic figure with which to determine both the success of your marketing campaigns and revenue projections.

Data-Driven Best Practices for Improving Your CLV

Even after factoring in CAC, your average customer lifetime value may fall within acceptable parameters by your own standards. However, even great CLV figures can be improved by focusing on the two components that the metric is built on: customer value and customer retention.

Increase Your Customer Value Through Personalization

Eighty percent of customers are more likely to buy from brands that personalize user experience . One of the most powerful methods of personalization is custom recommendations. Not only do customers view products with personalization in higher regard, but recommendations also provide opportunities for upselling. Amazon’s tried-and-true recommendation efforts account for 35% of the company’s total product sales.

Luckily, Amplitude acts as a personalization engine. It lets you segment your customers by past behavior and build campaigns focused on their shared interests. If a group of customers buys new furnace filters every three months like clockwork, you might send a blast of emails to this group a few weeks early in anticipation of their needs.

Recommendations aren’t limited by past behaviors. Amplitude Recommend empowers you to build cohorts based on the likelihood of customers behaving a certain way in the future. Recommendations can be directed to customers likely to purchase new products based on a combination of historical and behavioral data, statistical modeling, and computer learning. A prediction may suggest that a customer who recently purchased a dog toy is likely to need dog food in the near future.

Increase Your Customer Retention by Minimizing Friction

Issues with the customer experience often stem from issues with the UI. Many of these issues can be identified through direct customer feedback or routine usability testing. In fact, it’s been suggested that as few as five users in a test setting can identify 85% of usability issues .

Amplitude provides data-backed ways of identifying and rectifying points of friction. For instance, a review of the analytics for your music streaming service may reveal that most customers on a free trial of your product churn within a day of signing up. You further identify that 50% of free trial users never even stream a single song.

Running predictions through Amplitude Recommend suggests that users who download a song within the first day of signing up for a trial are 60% more likely to convert at the end of it. You and your product development team work to build a new workflow that focuses on directly guiding users to their first download.

However, switching all of your customers to the new flow without testing it could create unforeseen disruptions to your customer journey. Instead, you use Amplitude to create a segment of users with a low likelihood of conversion and send them through the new workflow, comparing conversion rates to those in a similar segment who were kept in your existing process.

Improve Your Customer Lifetime Value

Users are attracted to quality products. Personalization and retention efforts will fall flat if customers aren’t engaged with a product that fulfills their needs in a way no other product can. Bake value into your product or new feature at the earliest stages of development so that later efforts to increase CLV are built on the strong foundation of a customer-pleasing product.

• Experience is everything: Here’s how to get it right , PwC.
• Hawthorne Effect , Investopedia.
• How retailers can keep up with consumers , McKinsey.
• New Epsilon research indicates 80% of consumers are more likely to make a purchase when brands offer personalized experiences , Epsilon.
• The state of Customer Lifetime Value report , Criteo.
• Why you only need to test with five users (explained) , MeasuringU.

Learn more about growing customer lifetime value with the Mastering Retention playbook .

About the Author

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• How to Calculate Customer Lifetime Value (CLV)? [Formula and Tips to Improve It]

When people plan their monthly or even daily budgets, a cup of coffee never seems to make the list of their top spends. But you’re probably wondering what it has to do with customer lifetime value.     Well, an average American spends $32,000 , over their lifetime, on their daily cup of brew from Starbucks.     To put things into perspective, the daily purchase in the range of $2-$4 over time becomes equivalent to the cost of: 

• A modest SUV  
• A vacation abroad 
• The seed money for your small business 

Instead, the entire amount goes to Starbucks.  To put it simply, $3200 is an average American’s customer lifetime value (CLV) at Starbucks! Now, after this tiny lesson, let’s understand what CLV is in-depth.

What is customer lifetime value?

Customer Lifetime Value is the total revenue each customer brings over the period of their association with your business. For example, in the case of Starbucks, the average CLV is $32,000, which is calculated by multiplying the average order value ($3.5) with the number of orders placed (approximately $9.1k) by a customer.  

The exact approximation doesn’t apply across all businesses. The emphasis on increasing the customer lifetime value also depends on the type of industry.

The importance of customer lifetime value for product vs. service businesses  

To increase profitability, all businesses can benefit from expanding their customer lifetime value. But, for some businesses, tracking CLV is more important than others.  

Let’s discuss this for product and service-based businesses.  

1. Customer lifetime value for product-based businesses   

Product-based businesses can have one-time purchases, such as buying a house or an expensive car, or recurrent purchases, like buying multiple courses from an Edtech business.   

These types of businesses benefit from customer lifetime value but only to a limited extent. For one-time purchases, like a car, there is a possibility that the client will appreciate the service extended and buy another vehicle or additional accessories, but it pretty much ends there.   

While for an Edtech business, the opportunity to cross-sell courses or upsell programs extends across different subjects and academic years. For example, a student in 11th grade who has opted for Physics and Chemistry courses can also purchase the mathematics course or coaching for competitive exams. The only limit on the student’s lifetime value is when they graduate from high school and enroll in a university.   

The lifetime value for such businesses depends more on customer referrals and satisfaction. Some of the sales metrics that product-based businesses can track are:  

• Net Promoter Score (NPS) to gauge customer satisfaction  
• Overall Customer Satisfaction (CSAT) 
• Number of referrals  
• Average order values

2. Customer lifetime value for service-based businesses

Using customer lifetime value, service-based businesses can structure their targets, marketing spends, and gross margins. Service-based businesses such as OTT platforms (Netflix and Amazon Prime) and SaaS businesses operate on a renewal model. Unlike product-based companies, the payment isn’t a one-time investment for their customers.  

These service-based sector needs to ensure that the customer doesn’t switch over to their competitor. And if a customer does churn , the revenue they generate is higher than the sum of the acquisition cost and the service cost.  

Since customer lifetime value is an important parameter for this industry, its calculation is a little complicated and depends on various factors. We’ll get to that a bit later in this article.  

Essentially, all kinds of businesses benefit as the CLV increases. The most significant factor that affects CLV is customer satisfaction . Satisfied customers are an asset to your business because they have no reason to seek an alternative.  

But, increasing CLV isn’t a Herculean task!  

Because retaining a client is a relatively passive activity, you don’t need to convince them to choose your business or implement any services. Retaining a customer cost up to five times less than acquiring a new customer. 

Why do you need to calculate customer lifetime value?  

Along with improving customer retention , calculating and tracking customer value has many more benefits! A high CLV helps you achieve the following:

1. Improved Profitability  

Acquiring new customers is expensive. From the marketing spends that go into lead generation to the product being adopted by your user, you’ve covered a long journey before a prospect becomes a customer.  

But if this customer opts out after the first year of usage of your services or makes no recurring purchases, the customer acquisition cost can exceed CLV. In contrast, if the customer keeps renewing or making new purchases, your CLV and hence profitability shoots up. As a rule of thumb, your CLV should be at least three times your CAC .  

Increasing the customer lifetime, or the number of years that they are associated with your business directly translates to higher revenue. Focusing on customer success and measuring average CLV across segments help companies extend customer lifetime.  

2. Decrease Churn   

Churn ’s what all businesses are running away from; it makes your sales and marketing efforts go in vain. The opposite of churn is a good customer value that signifies a high customer success rate.  

By focusing on increasing customer lifetime value, you are essentially targeting the touchpoints where most customers drop off. If the customer’s predicted CLV is low, it indicates that the account will churn soon, so your teams can try to troubleshoot the problem areas for the account and improve the customer retention rate .

3. Streamline your Business Goals   

Every business wants customers who keep adding revenue to your business. Identifying similarities between high-CLV customers can help you segment your users based on purchasing patterns, regions, industries, or other parameters relevant to your business.  

Calculating customer lifetime value can help you shift your focus towards new opportunities with a historically high lifetime value. A directed approach leads you towards valuable customers with improved product-market fitment and faster conversions.  

4. Strategize Marketing Campaigns  

Customer lifetime value impacts two teams, customer support, and marketing. For customers with a lower predicted CLV, customer experience management decreases the possibility of churn. And for customers with a longer customer lifetime, the marketing team can swoop in to increase upsell and cross-sell opportunities.     The marketing team can restructure their budgets towards high-return activities with the correct data on high-value customers and profitable segments. The lifetime value itself is a metric that can be used to evaluate long-term financial returns from marketing investments.  

The first step toward achieving these benefits is knowing how to calculate CLV. 

How to calculate customer lifetime value?  

There are a couple of ways in which a business can calculate CLV. You can choose one of these based on the most reliable and trackable metrics. As the complexity of your business increases, you might have to factor in variable metrics for the CLV calculation.  

1. Simple Customer Lifetime Value Calculation  

This formula considers customer lifetime value as a function of the monetary input and output related to the customer. The discount rate and gross margins are not considered for this calculation. If you’ve just started tracking your CLV, you can consider using this formula to calculate it individually for each customer.  

Simple Customer Lifetime Value Calculation formula: 

This calculator will help you find the Simple Customer Lifetime Value for your business:

Your Simple Customer Lifetime Value is: $

Check out our article on Customer Acquisition Cost for average customer acquisition costs across different channels and industries. 

2. Historic Customer Lifetime Value Calculation  

Calculating CLV historically is possible only if you have the data of all the transactions that each customer makes. The transactions can be individual purchases, monthly/yearly renewals of the service, and revenues from upsells and cross-sells .  

Historic Customer Lifetime Value Calculation formula: 

Where Average Gross Margin = (Total Revenue – Cost of Goods Sold)/Total Revenue x 100  

3. Predictive Customer Lifetime Value Calculation   

Many businesses opt to calculate the predictive CLV instead of the historical model. Predictive models utilize the previous trends and data to estimate the lifetime value for new customers. This model helps you strategize your business plans and set targets for sales teams.  

Businesses are also developing smarter ways to analyze data using machine learning and predictive models. Based on the kind of approach, you can predict CLV in the following ways:     1. Historical Approach:  

• Aggregate Model: This model considers previous transactions to predict a value for CLV. 
• Cohort Model: Customers need to be segregated into segments/cohorts based on similar characteristics—industry type, transaction date, etc. The customer lifetime value is calculated for each cohort individually.  

2. Predictive Approach  

• Machine Learning (ML) Model: A regression analysis is conducted on past transactions and customer data to forecast the CLV. It is a highly dynamic model, and with the right framework, the customer lifetime value can be updated in real-time.  
• Probabilistic Model: A probability distribution is applied to the customer data to estimate value from the transactions in the future. The CLV is calculated on the predicted transaction values. 

These models are highly accurate but developing complicated frameworks for transactional data is not feasible for many businesses.  

But if you’ve recorded and tracked the right data using a Customer Relationship Management (CRM) or a lead management tool , you can use this simpler formula to forecast the overall CLV.

Predictive Customer Lifetime Value Calculation formula: 

You need to use the recorded sales data for these metrics. Here’s how you calculate them:  

• Average Order Value (AOV) = Total Revenue / Number of Orders
• Purchase Frequency = Total Number of Orders / Total number of Customers   
• Average Customer Lifespan = Sum of Customer Lifespan (in years)/ Total Number of Customers  

Note: The Predictive Customer Lifetime Value is calculated over a specific time period.  

Don’t fret if you’re not a math genius, and you don’t have to be one to calculate your CLV in under 2 minutes. Just use our customer lifetime value calculator:  

Your Customer Acquisition Cost is: $

4. Traditional Customer Lifetime Value Calculation   

The traditional calculation is best suited for businesses that don’t have a flat revenue model. Businesses where the pricing changes over time (for example, SaaS) or the cost of renewal rates varies over time (for example, Insurance) can utilize this formula to calculate CLV. It also accounts for inflation.  

Traditional Customer Lifetime Value Calculation formula:  

Where,  

• Gross Margin = Total Sales Revenue – Cost of Goods Sold / Total Sales Revenue 
• Customer Retention Rate = Number of users that stayed over the time period / Total number of users  
• The discount rate accounts for inflation and for convenience, the value can be taken as 10%.  

After choosing the Customer Lifetime Value Structure that works the best for you, the next couple of steps are to track it effectively and work towards improving it. These six tips can help you improve your CLV! 

How to improve customer lifetime value?  

1. maintain customer relationships  .

The key to sales is working on customer relationship building. And the same extends to customer retention , especially for service-based businesses. Creating a meaningful customer relationship begins with listening to your customer.  

And that’s an insight that we learnt from this incredible session hosted by Navish Bijalwan, Enterprise Sales Manager, at MCUBE. You can watch the webinar where he shares other nuggets of wisdom on how businesses can improve customer connections with telephony:

Create touchpoints to collect your customer’s feedback and use it to improve your product or service. The customer should also have a few channels where they can reach out to your business. Your customers should have 24×7 accessibility, to at least one channel, either by call or chat.  

You can implement LeadSquared , a Customer Relationship Management tool to manage leads and feedback. It ensures that each customer activity and feedback is tracked for a quick resolution with a shorter TAT. 

2. Manage expectations  

To gain your customer’s trust, you must deliver what you promise. If your product/service underdelivers or lets the customer down, it’ll lead to churn . And your product is probably not at fault here.  

As a business, customer segmentation can help you find the right product fitment for customers from different industries or varying attributes. You can also understand their interests and buying intent based on their engagement with your marketing initiatives. Essentially, figure out what they need and provide the right solution to increase the customer lifetime.  

3. Identify cross-sell and upsell opportunities  

Upselling and cross-selling boost your business’ profitability. But not every customer fits the bill for this segment.  

Maintain a close customer relationships to understand their current product usage and identify opportunities to cross-sell and upsell. Frequent audits of how the customer uses your service or the purchase frequency of your product can help you discover new opportunities .  

Whether it’s a new update, feature, or accessory, the customer should believe that it’s an essential complementary addition to their current purchase. Based on previous activities, service-related businesses can use marketing automation to educate and nurture their customers. In contrast, product-related businesses can gather more insights into the user’s persona and use it to upsell. For example, suggesting a laptop with higher RAM to a software engineer.  

4. Increase the average order value 

“Would you like to make it a meal?” This is something that everyone’s heard at fast-food chains. It’s how they increase your order value from one burger for $1.99 to a meal worth $3.99. The same idea can apply to many businesses. For example, 

• Offering pre-paid servicing to new car owners. 
• E-commerce sites cross-selling products with their “customers also bought section.” 

Understanding your client’s long-term goals help you recommend relevant services and products. SAAS businesses can also create service packs to become an end-to-end solution for businesses. Clubbing services or making products sound like add-ons ease the customer into deciding to buy.  

5. Introduce new discounts and rewards  

Loyal customers deserve all your appreciation, along with a few additional perks! Businesses need to keep their customers happy and excited about their service. And everyone loves a good deal.  

You can introduce discounts on renewals; even seasonal discounts on products go a long way. But CLV highly depends on the cost of customer acquisition (CAC) . Starting a referral program helps you decrease CAC while rewarding your customers.  

Word of mouth influences around 20-50% of purchasing decisions, especially when a customer is trying out your product/service for the first time. The value that a referred customer generates is also 16% higher than a non-referred customer.  

Membership programs work out pretty well for product-based businesses. Here, a membership card guarantees discounts on future purchases, which is a great incentive for customers to stick to your business.  

In this article, we’ve covered everything related to customer lifetime value, but the ability to track your customer’s journey is the first and most crucial step towards improving it. Different stages in your post-sales process—product implementation and adoption, collecting customer feedback, and tracking usage—affect CLV. You need complete visibility into these and your customer’s activity for a higher CLV. 

LeadSquared can help you track customer activity and record essential metrics to calculate customer lifetime value. And if you’re looking to improve it, you’re just a demo away. Get in touch with our team today!

Customer Lifetime Value is a direct indicator of your business’ profitability. A high CLV is proof that you’ve achieved the correct product-market fitment and brand loyalty with your customers. It leads to higher customer retention and turnover for your business.  

There are a few approaches that you can use to calculate customer lifetime value—Simple, Historical, Predictive, and Traditional. An easy formula to calculate the overall CLV for your business is:  Customer Lifetime Value = Average Order Value X Purchase Frequency X Average Customer Lifespan  

A business should aim for its customer lifetime value to be at least three times the cost of customer acquisition. It ensures that your marketing budgets are in check and your customer retention continues to be high. For example, if your CAC is $50, a healthy CLV would be $150 or higher.  

Kritika is a content writer at LeadSquared. She loves reading and is trying to learn more about sales. Through her writing, she wants to make sales easier for everyone. You can connect with her on LinkedIn or write to her at [email protected].

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Customer Lifetime Value (CLV or LTV)

What is customer lifetime value.

Customer lifetime value is the estimated amount of money received from a customer over the entire length of their relationship with a business. CLV, or LTV, tells you exactly what you need to know about how well your product resonates with your customers, what you’re doing well, and which areas need improvement. It’s a critical metric for calculating the return on acquisition costs and understanding the long-term outlook of your business model.

• Billings and Collections
• Bookings and Customers Annual Contract Value (ACV) Average Contract Length (ACL) Average Sale Price (ASP) CAC Payback Period Churn Rate Cost to Serve Customer Acquisition Cost (CAC) Customer Count Customer Lifetime Value (CLV/LTV) Customer Retention Cost Negative Churn LTV/CAC Ratio Logo Retention Renewal Rate Bookings Customer Attrition
• Cashflow and Expenses
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Every customer who buys your product represents the beginning of a potentially beautiful new relationship—and as with any budding romance, you’re probably wondering, “How much does this person like me (i.e., my product or service)?” “Will we burn hot and fast or long and slow?” “Can we grow together?” “Will their friends and family like me?” Luckily, there’s a way to gauge which customer relationships deserve to be nurtured and which were doomed before they began — no awkward conversations or gossip brunches required. It’s called customer lifetime value.

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How Do You Calculate Customer Lifetime Value?

You calculate customer lifetime value by multiplying your average revenue per user (ARPU) by gross margin and dividing that number by your churn rate .

While there are more complex ways to look at LTV, this basic customer lifetime value formula focuses on three primary inputs:

• ARPU. The average revenue per user for your customer base over a given time period (e.g., one year).
• Gross margin . Your net sales revenue minus cost of revenue shows your profit margins across the business.
• Churn or attrition rate . The percentage of customers who stopped using your product or service in the given period. It’s the inverse of your logo retention rate.

By this calculation, it’s no surprise that the longer a customer continues to buy your product or service, the greater their lifetime value becomes.

Customer Lifetime Value Calculator Tool

Your Customer Lifetime Value

Customer Lifetime Value Example Calculation

Average Revenue Per User (ARPU): Suppose a service has an ARPU of $120 per month.

Gross Margin: The gross margin for this service is 80%. This means that after subtracting the cost of delivering the service, 80% of the revenue is retained as profit.

Churn Rate: The churn rate, which represents the percentage of customers discontinuing their service each year, is 5%.

Using the basic LTV formula:

LTV= $120 x 80% / 5% = $96 / 0.05 =$1,920

Therefore, the LTV for a customer in this example is $1920. This figure represents the net profit that is expected to be generated, on average, from each customer over the duration of their relationship with the service.

What’s the Difference Between CLV and LTV?

There’s no material difference between the terms “CLV” and “LTV” (or even CLTV). These acronyms all refer to customer lifetime value which is a useful financial ratio that can be used to analyze a company , and are often used interchangeably. For many companies, usage of each term often comes down to an agreed-upon preference (ours is LTV).

However, some companies will distinguish between CLV and LTV in terms of granularity. In those cases, LTV refers to the average customer lifetime value across the entire customer base, whereas CLV refers to lifetime value for an individual account.

We view that kind of granularity as a drill-down view of the same metric, so we refer to customer lifetime value as LTV in all cases.

Why Does Customer Lifetime Value Matter?

Customer lifetime value is an extremely important metric in SaaS because it tells you the total revenue you can expect a customer to generate over the course of your relationship together.

While finance teams don’t directly impact the customer experience, your ability to accurately calculate the lifetime value of a customer can help partners in the C-suite, product, sales, marketing, and customer support understand a few important things.

• Calculating customer lifetime value can give executives insight into the long-term viability of the business model.
• Understanding the value of customer relationships helps CS and support justify the costs of new initiatives like loyalty programs or investments in automation that could streamline processes and improve overall customer satisfaction.
• Seeing LTV according to customer segments can help marketing refine their strategies for targeting new customers with upcoming campaigns. And it can help sales improve cross-sell strategies for accounts that are most valuable to the business.
• Visibility into the lifetime value of current customers can help forecast and plan more accurately for the future. It helps you understand the true business impact of modeling out improved customer retention rates and assumptions of longer customer lifespans.

Get the 10 SaaS Metrics You Didn't Know You Needed

Tried and tested ways to improve ltv.

SaaS companies can live and die by their ability to build momentum with their customer bases. While top-line growth gets so much attention, you also have to show that you can retain those customers and create a sustainable business.

To that end, there are three primary levers you can pull to improve LTV.

Invest in Customer Success

Perhaps the strongest lever you can pull to increase LTV is improving customer retention. It costs a whole lot more to acquire new customers than to retain existing customers. That‘s why performing a customer retention analysis and investing in customer success can be critical. This could mean improving communication about upcoming feature releases, lowering the time to resolution for support tickets, or increasing the customer onboarding experience — anything that could potentially increase customer loyalty.

Raise Your Prices

The most basic way to increase LTV is to raise your pricing. Boosting average order value (in ecommerce) or annual contract value (in SaaS) gives you more revenue per customer, assuming all else remains equal. But there are diminishing returns. You always have to balance pricing with the value your product delivers to customers.

Build Price Escalations Into Your Contracts

You can increase LTV by adding more customization to your SaaS pricing strategy . Creating add-on features and escalation factors for product usage can naturally increase net revenue retention — which in turn increases LTV.

LTV is a highly-nuanced metric, which means there are many more ways you could potentially increase it for your business. However, the three options listed here are among the most basic because they tie directly to the metrics you use to calculate LTV.

Why Tracking LTV Used To Be So Difficult

The truth is: Tracking LTV is hard. Obtaining metrics to define something as ethereal as customer sentiment requires a lot of data. You’ll need to track when your customer purchased your product, the length and price of their contract, and related upsells, downgrades, and renewal rates . You’ll also want to filter it all by vintage and product line, so you can see how seasons, time periods, and offering types impact your customer relationships.

That’s a lot of customer data throughout the customer lifecycle from various touchpoints, and it probably lives deep within your CRM in less-than-accessible places and less-than-intuitive formats. It takes a good deal of human power to pull, scrub, input, and analyze all that deep-down data. You’ll also want to overlay it on your customer acquisition cost (CAC), so you can really start optimizing your business for long-term sustainable growth.

The obvious issue here is that there’s never been a tool that can produce the LTV metric for you—it has typically required a maddening amount of manual analysis and number-crunching in spreadsheets, and the process can be time-intensive and error-prone.

But don’t worry. There’s hope.

How to Calculate Lifetime Value (Without Taking Years Off Your Life)

Mosaic connects to your CRM and automatically collects, normalizes, and calculates your customer LTV. It even groups customers by cohort and product line, so you can track the effectiveness of specific sales and marketing efforts and pin down the most valuable customer journeys and milestones — all in real-time.

Having a solid (and current) understanding of your LTV can help your business identify successful strategies for customer onboarding and retention, as well as common customer stumbling blocks, which helps you plan for smart, sustainable growth and boost your bottom line.

Want to learn how Mosaic can help you automate LTV calculations and put this critical metric in context with the other metrics that matter most to your business? Request a personalized demo today.

Customer Lifetime Value FAQs

What is the formula to calculate customer lifetime value.

The CLV formula is (Average Revenue Per User * Gross Margin) / Churn Rate. This means that the customer lifetime value calculation favors a higher ARPU and gross margin, as well as a lower churn rate. The best customers that can ultimately lead you to negative churn are high-value customers with a longer than average customer lifespan.

How do you increase Customer Lifetime Value?

The best way to improve LTV is to generate more brand loyalty and create loyal customers. This can include anything from improving your customer retention through a strong presence on social media about upcoming features to improving the client experience based on customer feedback, ensuring your customers’ basic needs are met, and going the extra mile to add value for them. You can also raise prices to increase average CLV, although this is a less sustainable way to increase lifetime value.

What qualifies as a high CLV value?

A high customer lifetime value is three times your customer acquisition cost. If your LTV/CAC ratio is lower than that, it can mean your business is losing money in customer acquisition, while a ratio of more than 3:1 can indicate that you’re not putting enough money into growth opportunities.

Explore Related Metrics

The annual contract value of all signed deals in a given period.

Annual Contract Value (ACV)

The mean length (in months) of contracts signed based on the opportunity close date.

Average Contract Length (ACL)

The average booking amount per deal.

Average Sale Price (ASP)

The projected time (in months) to recoup the costs of acquiring a customer.

CAC Payback Period

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What Is Customer Lifetime Value?

Emily Kho is a seasoned writer with a specialization in B2B, EdTech and real estate. She has a Bachelor of Science from the prestigious William F. Harrah College of Hospitality at the University of Nevada, Las Vegas. In her free time, she loves going to the beach, snowboarding and reading.

Kara is an editor from North Carolina with experience in business technology and services topics as well as health. She is dedicated to delivering clear and captivating content to readers who want to make well-informed choices. Throughout her career, Kara has collaborated with and advised many small businesses in diverse marketing roles. Such experiences offer her a distinct viewpoint on how appropriate technology and services can drive growth for entrepreneurs. Kara’s writing has appeared on Verywellfamily.com, Labroots.com, and SkinnyMs.com.

Customer Lifetime Value (CLV) is a crucial metric that paints a comprehensive picture of a customer’s worth to a business over the entire span of their relationship. It’s an essential data point that enables businesses not only to understand but also to predict the long-term value of their customer base. By focusing on CLV, businesses can shift their marketing strategy from short-term gains to long-term profitability and sustainability.

Understanding CLV is particularly vital in a world where customer acquisition costs are rising, and customer loyalty is increasingly fickle. It helps businesses recognize which customers are the most profitable and which ones they should invest more.

This article will guide you through the concept of CLV, its importance in strategic decision-making and practical steps to calculate it. Whether you are a seasoned business owner or a new manager, mastering CLV can be a game changer in optimizing your business operations and maximizing revenue.

What Does Customer Lifetime Value Represent?

CLV captures the total financial value a customer brings to a business throughout their entire relationship. It’s a powerful indicator of customer profitability, extending beyond single transactions to encompass the entire duration of a customer’s engagement with a business. This measurement isn’t just about the revenue generated from a customer but also factors in the costs associated with acquiring and serving them. 

By quantifying the worth of a customer in monetary terms, CLV aids businesses in understanding the long-term impact of their customer relationships, guiding them in making informed decisions about marketing, sales and product development strategies.

The Three Main Components of CLV

At the heart of CLV are three critical variables:

• Average order value (AOV): The average amount a customer spends each time they make a purchase; pivotal in understanding customers’ spending habits and potential value
• Purchase frequency: Sheds light on how often customers engage with your business, offering insights into their loyalty and the effectiveness of your retention strategies
• Customer lifespan: The duration for which a customer remains active with your business, which helps forecast future revenue streams

Together, these factors provide a comprehensive view of the economic value of customer relationships, enabling businesses to tailor their strategies for maximum impact.

Influential Factors and Their Business Implications

CLV is influenced by myriad factors ranging from customer support quality to marketing campaigns’ effectiveness. A positive customer experience can increase the likelihood of repeat purchases and extend the customer lifespan, thus enhancing CLV. Similarly, targeted marketing efforts that resonate with the right audience can improve purchase frequency and AOV.

Understanding these influencers helps businesses identify areas that require improvement or investment. For instance, investing in customer service may increase costs in the short term but can significantly boost CLV in the long run. Thus, by comprehensively analyzing the factors that impact CLV, businesses can devise strategies that attract customers and turn them into loyal customers and long-term patrons.

How To Calculate Customer Lifetime Value

CLV requires a systematic approach that involves multiple financial metrics. The fundamental formula for CLV is based on understanding the revenue a customer generates, the margins on that revenue and the duration for which they remain a customer.

To start, you need to determine the average revenue per customer, which can be gross revenue or net profit, depending on whether you want to calculate CLV in terms of sales or profitability. The profit margin per customer is another crucial input, reflecting the actual profit earned from each customer after accounting for the costs associated with their acquisition and service.

Additionally, the predicted retention rate, which is the probability of a customer continuing to buy in the future, plays a significant role in calculating CLV.

Steps To Calculate CLV

The calculation of CLV can be broken down into the following key steps:

• Determine time period and metrics: Decide on the timeframe over which you want to calculate CLV (e.g., annually over the customer’s lifetime) and identify the relevant metrics such as AOV, purchase frequency and customer lifespan.
• Identify retention rate and predict churn: Estimate the percentage of customers expected to continue purchasing from your business. A lower churn rate (percentage of customers who stop buying) indicates a higher retention rate, which positively impacts CLV.
• Calculate profit margin per customer: Determine the average profit margin earned from each customer. This figure is crucial in understanding how much net value each customer brings to the company.
• Apply formula and inputs: Use the collected data to calculate CLV using the formula: CLV = Average Revenue per Customer x Profit Margin x Retention Rate.

Mastering the calculation of CLV is a crucial step toward understanding and maximizing customer value. This knowledge guides strategic decisions and paves the way for sustainable growth and profitability. Remember, CLV is not just a number; it’s a reflection of the strength and potential of your customer relationships.

Simple Example CLV Calculator in Excel

To create a basic CLV calculator in Excel, follow these steps:

• Enter your sample data, including average order value, purchase frequency and customer lifespan.
• Calculate the average revenue per customer (e.g., average order value multiplied by purchase frequency).
• Input your profit margin as a percentage.
• Estimate the retention rate based on historical data or industry benchmarks.
• Apply the CLV formula by multiplying the average revenue per customer by the profit margin and then by the retention rate.

This simple Excel model allows you to input various scenarios and see how changes in these key metrics can affect the CLV. It’s a practical tool for understanding the potential value of your customer base and can aid in making strategic decisions about where to allocate resources for maximum impact.

Benefits of Calculating Customer Lifetime Value

CLV is more than just an exercise in number-crunching; it offers tangible benefits that can substantially impact a business’s bottom line and strategic direction. Understanding the CLV helps businesses in several key areas.

• Enhanced customer segmentation and targeting: Understanding CLV enables more effective targeting and resource allocation toward the most profitable customer segments.
• Improved customer retention strategies: Insights from CLV calculations aid in developing focused strategies to retain high-value customers, which is often more cost-effective than acquiring new customers.
• Optimized pricing strategies: CLV insights help in tailoring pricing strategies to maximize long-term customer value.
• Informed decision-making for product and service development: Knowledge of CLV can guide investment decisions in product development, aligning offerings with the preferences of high-value customers.
• Efficient allocation of resources: CLV calculation allows for more strategic allocation of operational resources, particularly in marketing, customer service and product development.
• Long-term profitability and growth: Focusing on increasing CLV aligns with sustainable business growth and long-term profitability, fostering valuable customer relationships.

The calculation and application of CLV are instrumental in driving a customer-centric approach to business. This approach enhances customer satisfaction and loyalty and leads to more efficient and profitable business operations.

Using CLV Data To Improve Business Performance

Utilizing CLV data effectively can significantly enhance various aspects of business performance. Here are examples illustrating how CLV data can be applied in different business contexts:

• Targeting high-value customer segments: A luxury car dealership might use CLV data to identify that their most profitable segment is customers in the 35-50 age range who prefer SUVs. They can then focus their marketing efforts, like exclusive test drive events and personalized communication, specifically toward this group, maximizing the impact of their resources.
• Enhancing customer experience: A boutique hotel chain could use CLV insights to recognize that repeat customers appreciate personalized experiences. They might implement a system to remember guest preferences, like room temperature or pillow type, ensuring these are set for each visit, thereby enhancing the customer experience and encouraging repeat bookings.
• Strategic resource allocation: An e-commerce platform may find that customers with the highest CLV frequently purchase from a specific category, such as home electronics. This insight could lead them to allocate more resources to expanding this category, improving the product’s user interface and training customer service staff to provide expert advice in this area.
• Optimizing marketing spend: A software company could use CLV data to identify that their long-term existing customers often come from referral programs. This realization might lead them to allocate a larger portion of their marketing budget to enhancing and promoting their referral program, ensuring a higher return on investment.
• Driving product and service innovation: A fitness equipment manufacturer may discover through CLV analysis that their most valuable customers are interested in high-tech features. This insight can guide them to innovate and invest in smart technology integration in their equipment, catering to this customer segment’s preferences and standing out in the market.
• Forecasting and planning: A grocery store chain might use CLV data to forecast future revenue and plan expansions. By analyzing CLV across different regions, they can make informed decisions about where to open new stores or enhance existing ones, aligning their expansion plans with areas with higher potential customer value.

These examples demonstrate how integrating CLV data into business strategies can enhance the understanding of customer value and drive more effective and efficient operations, leading to improved business performance and growth.

Comparing High vs. Low Lifetime Value Customers

High and low CLV customers present distinct characteristics and value propositions for businesses. High CLV customers are typically marketed by their frequent and consistent purchases, higher spending and strong brand loyalty. For instance, a high CLV customer at a specialty coffee shop might regularly buy artisanal blends and participate in tasting events, showcasing a strong connection to the brand.

In contrast, low CLV customers usually engage in sporadic, lower-value transactions and exhibit minimal brand loyalty. These customers may only interact with the business during sales or when specific news arises. For example, a low CLV customer at an electronics store might only purchase items during clearance sales, contributing to less long-term revenue.

Understanding these differences is crucial for businesses, as it allows them to tailor their strategies. Investing in personalized marketing and loyalty incentives for high CLV customers can maximize profitability while exploring ways to enhance engagement and spending among low CLV customers can potentially convert them into more valuable patrons over time.

Predictive vs. Historical CLV Models

Predictive CLV models use data analytics to forecast future value, incorporating factors like market trends, customer demographics and economic indicators. A company might use predictive modeling to estimate customer value based on their engagement patterns and potential future interactions. These models are essential for forward-looking strategies but rely heavily on the data quality and analytical methods used.

Historical CLV models, in contrast, analyze past customer data to determine their value, focusing on previous purchase history and engagement levels. For example, a business might calculate a customer lifetime value based on their past year purchases. While this offers valuable insights into past behavior, it doesn’t always accurately predict future customer actions or spending changes.

Common Challenges Calculating CLV

Calculating CLV presents unique challenges that businesses must address for accurate and effective measurement, including:

• Data quality and availability: Ensuring access to complete, consistent and high-quality data is challenging, especially for new businesses with limited historical customer information.
• Predicting customer behavior: Accurately forecasting how long customers will remain and how their spending habits might change is difficult due to the dynamic nature of customer preferences and market conditions.
• Complexity of integration and analysis: Integrating data from various sources and applying the right analytical methods to calculate CLV can be complex and resource-intensive.
• Balancing short-term and long-term metrics: Aligning CLV, which is a long-term metric, with short-term business goals and performance indicators can be challenging for businesses focused on immediate results.

These challenges require careful consideration and strategic approaches to ensure that the CLV calculated is both accurate and actionable for business decision-making.

CLV vs. Customer Acquisition Cost (CAC)

CLV quantifies the total revenue a business can expect from a customer, while customer acquisition cost (CAC) represents the cost to acquire that customer. Ideally, CLV should be significantly higher than CAC for a business model to be sustainable. For example, if a business’s CAC is $100 per customer but the CLV is $600, it indicates a healthy return on investment.

The comparison between CLV and CAC provides insights into the efficiency of a company’s marketing and customer acquisition strategies. A higher CLV relative to CAC suggests effective conversion of marketing efforts into profitable long-term customer relationships. If CAC is disproportionately high, it may signal the need to reevaluate marketing tactics or enhance customer retention strategies to increase CLV. 

Balancing these two metrics is essential for maintaining sustainable business growth.

The Bottom Line

Customer Lifetime Value (CLV) is an important metric that offers profound insights into a business’s long-term profitability and health. Understanding and effectively utilizing CLV can guide strategic decision-making, from enhancing customer retention strategies to optimizing marketing spend. It enables businesses to focus on building profitable, long-lasting customer relationships rather than just driving short-term sales. 

When balanced with Customer Acquisition Cost (CAC), CLV becomes a powerful tool for assessing a business’s sustainability and growth potential, ensuring that efforts and resources are invested where they yield the highest returns.

Frequently Asked Questions

What is a good CLV?

A good CLV is generally considered strong if it’s at least three times greater than the Customer Acquisition Cost (CAC), though it can vary by industry.

How do you increase CLV?

Increasing CLV can be achieved by enhancing customer satisfaction and loyalty, offering quality products or services and implementing effective upselling or cross-selling strategies.

What is the difference between LTV and CLV?

Lifetime Value (LTV) and Customer Lifetime Value (CLV) are often used interchangeably, but some interpretations suggest LTV includes non-monetary value like referrals, in addition to the direct financial contributions measured by CLV.

Why is having a high CLV important?

A high CLV indicates that customers are bringing significant value to your business over time, which is crucial for long-term profitability and sustainable growth.

What are typical CLV values by industry?

Typical CLV values vary widely across industries. For example, luxury goods might have a higher CLV than fast fashion, reflecting differences in customer spending habits and brand loyalty.

How do you choose inputs for CLV calculations?

Inputs for CLV calculations should be chosen based on accurate, relevant historical data, including average order value, purchase frequency and customer retention rates.

If you have questions about this page, please reach out to our editors at [email protected] .

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What is Customer Lifetime Value (CLV) – Definition, Formula, Calculation with Examples

New customers are always exciting, but which ones are contributing most to your revenue growth?

The customer who makes a one-time purchase worth $1000 or the one who makes repeated purchases of $50 for several years?

It turns out that a customer who makes small yet repeated purchases for years is often the one to bring more revenue than the one who splurges on a discount once and doesn’t come back. Hence, it’s good for your marketing and customer success teams to focus on retaining such kind of high-value customers. But how do you figure out which of those are high-value customers?

That’s where the metric Customer Lifetime Value (CLV) enters. Measuring CLV can help you learn how well you resonate with your target audience, how much your customers like your product or service, what you should improve to earn their loyalty, and how you should budget for your customer retention campaigns.

This guide will walk you through what CLV is, how you can accurately calculate it, and why monitoring is crucial for any subscription business.

What is Customer Lifetime Value(CLV)?

Customer Lifetime Value (CLV) is the total predictable revenue your business can make from a customer during their lifetime as a paying customer.

For instance, if a customer subscribes to one of your products under a one-year plan, at that time, the lifetime of that customer is one year long. Their lifetime value will be the amount you expect to make in that year.

Hence, the longer the customers stay and the more often the customer buys from you, the greater will be their CLV.  If you can determine the profile of the customers that produce the highest CLV, you can use those profiles to acquire more customers that closely resemble those existing high-value customers.

Why is calculating Customer Lifetime Value important for your subscription business?

Let’s look at some of the significant benefits of monitoring CLV for a subscription business.

Identify high-value customers

Businesses don’t want to spend their money and resources on acquiring customers that will not be profitable. They want to know how much they should invest in marketing activities that will attract the best customers. But what does ‘Best Customer’ mean to them? There are different answers to this: Customers who are the most loyal, customers who are the most profitable, customers who are easier to attract and retain.

Well, how about all of the above? These are called high-value customers or customers having high Customer Lifetime Value (CLV). By calculating the CLV of each customer and ranking them by the results, you can identify the high-value customers. The higher the CLV, the more valuable the customer. Hence, measuring CLV helps you to knowledgeably build out your product, tailor your marketing and sales activities to maximize the likelihood of acquiring and retaining such high-value customers.

Determine how much to invest in the acquisition

Nothing bogs down a business faster than spending more money to acquire customers than you receive once they’ve signed with you. That’s why understanding how your CLV relates to the Customer Acquisition Cost is important. While CAC answers how much it costs to acquire a new customer, the CLV reflects the other half of the equation –  how much is a customer worth. The balanced ratio of these two metrics gives answers the ultimate question – “what is the true value of the customer to my business?”. Together, the metrics CAC and CLV represent a prototypical Return On Investment (ROI) a business can gain from an acquired customer and helps to check whether the investment levels are sustainable for long-term business viability and value creation.

Let’s understand the relation between CLV and CAC through the example of a subscription box business. Suppose they sell their products under three different plans: Small box: $8/box, Medium box: $16/box, and Big box: $21/box.

An average customer buys fifteen boxes every year for 8 years, so the revenue from a given customer equals $1800 [(8+16+21)/3 * 15 boxes * 8 years = $1800].

To earn $1800 from customers, the business first needs to target and acquire customers. They spend around $7500 a month to acquire 100 customers. Their CAC is $75 ($7500/100), meaning they spent $75 to acquire each customer. Additional costs that the business incurs per customer per year are $30.

The CLV of a customer to the business is therefore $1800 (calculated above) – $80 (Total CAC: 8 years * $10/year) – $30 (additional costs) = $1690.

This means that the average customer is worth $1690 in profit over the eight-year relationship with the business. Since the CAC of $75 is lesser than the CLV of $1690, we can infer that the business is spending its marketing budget wisely and will gain more profits from each customer than it invested in acquiring them.

Build brand loyalty

Brand loyalty is one of the important and most challenging strong points for a business to achieve. The CLV provides a better dimension to customer relationships by making businesses aware of a customer’s worth, especially those considered loyal having high CLV.

High CLV customers are loyal customers, and they offer your company many benefits. They stick with your business longer and offer valuable feedback as they grow with you. Those customers become the best brand advocates giving you good word-of-mouth referrals that hugely help in building your brand reputation.

Hence, focusing on improving your CLV through different loyalty initiatives plays a significant role in driving customer engagement and building strong brand loyalty.

How to calculate Customer Lifetime Value (CLV)?

Customer Lifetime Value is calculated by multiplying your customers’ average purchase value, average purchase frequency, and average customer lifespan.

Customer Lifetime Value formula:

Average Purchase Value (APV) can be calculated by totaling the revenue earned in a specific period and dividing it by the total number of sales generated during that same period.

For instance, if your business generated $20,000 revenue in a month from 200 sales, the APV for that period is $20,000 / 200 = $100.

Average Purchase Frequency (APF) is calculated by dividing the number of purchases made by the number of unique customers.

If a customer made multiple purchases over a specific period, they are counted only once in the calculation. If your business generated $20,000 in a year from 40 customers who collectively made 200 purchases, then the APF is 200 purchases / 40 customers = 5 times.

Average Customer Lifespan (ACL) is calculated by adding all of your customer lifespans and dividing by the total number of customers.

If your business is new and lacks the sample size of customers required for the calculation, ACL can also be derived from the churn rate.

Churn rate = (Customers at the beginning of the period – customers at the end of the period) / customers at the beginning of the period

For instance, if your business has 50 customers at the beginning of the month but only has 45 at the end of the month, then the churn rate is (50 – 45) / 50 = 0.1.

Then the Average Customer Lifespan (ACL) will be,

1/ Churn rate = 1 / 0.1 = 10 months.

Now that we have all the components needed for CLV, we can calculate it by simply multiplying them all together.

With an Average Purchase Value of $100, an Average Purchase Frequency of 5, and an Average Customer Lifespan of 36 months, the Customer Lifetime Value is:

Average CLV = $100 * 5 * 36  = $18,000

Using gross margin to get a more accurate CLV

Calculating CLV tells you how much revenue you’re getting from each customer, but not how much profit. To get a more accurate idea of the profitability of each customer, you’ll need to factor in your gross margin or the percentage of your revenue that generally goes toward buying more goods.

Your g ross margin is the percentage of your total revenue that remains after subtracting the Cost Of Goods Sold (COGS).

For instance, if your total revenue generated per month is $20,000 and your COGS is $8,000, you would first subtract the COGS from the revenue and get $20,000 – $8,000 = $12,000.

Then, divide the resulting value by the total revenue (12,000 / 20,000 = 0.6) to arrive at a gross margin of 0.6.

To represent gross margin as a percentage: 0.6 * 100 = 60%

To arrive at your more accurate CLV, multiply the customer value, average customer lifespan, and gross margin:

CLV = 500 * 36 * 0.6 = $10,800  

This value is significantly lower than the $18,000 we got from the earlier CLV calculation, showing that quite a lot of the revenue you get from each customer is simply recouping the cost of the goods they’re purchasing. If you want to understand the value of your customers in terms of the money you can actually put back into the rest of your business operations, it’s worthwhile to put in the effort to determine the gross margin and include it in the CLV calculation.

Approaches to CLV calculation

Although we saw one simple CLV formula above, there isn’t just one way to calculate CLV. There are several approaches, including historical, predictive, and traditional, and the best method to use depends on your business type and resources.

Historical approach

Historical CLV is a straightforward approach to calculating a customer’s lifetime value based on the gross profit your business has made in the past. The calculation is simple because you only need data on previous purchases. You can compute historical CLV using either Average Revenue Per User (ARPU) or cohort analysis.

Suppose that 20 of your customers brought in $1,300 in revenue for your business over three months. Your ARPU for three months is $1,300 / 20 = $65

Let’s calculate how much these customers will bring you in one year.

ARPU for 12 months = ARPU for 3 months * 4

$65 * 4 = $260 per year per customer

Cohort analysis takes the ARPU method further by grouping together customers who made their first purchase during the same month and have similar characteristics. If you have a large enough data set, you can use cohort analysis to calculate the average revenue for specific cohorts whose characteristics are relevant to the forecast you’re trying to create, instead of for your average customer.

The biggest drawback of historical CLV is that it lumps customers together who may not have the same purchasing behavior at all. This can be a problem if you’re changing your products or marketing behavior, for example. Changes you’ve made recently may already be bringing in new customers whose preferences and purchasing decisions won’t be accurately predicted by historical CLV. Cohort analysis can help to some extent, by allowing you to select cohorts of customers that are more likely to resemble your future customers. But as long as you’re still using data derived from older customer cohorts, you may still find that it’s not accurately predicting your future CLV.

Predictive approach

Predictive CLV is intended to measure the total value a customer will give a business eventually over their entire lifetime. The predictive approach is based on both historical transactions and current customers’ behavioral trends, such as purchase frequency. Unlike historical CLV, which can provide only insights into what has happened before, predictive CLV helps you understand the present worth of a customer and forecast how their value will change in the future. This may help you launch targeted campaigns and prioritize your acquisition and engagement activities so that they attract and retain customers with high lifetime value.

T: Average number of transactions per month

AOV: Average Order Value

AGM: Average Gross Margin

ALT: Average customer lifetime (in months)

Now let’s create some hypothetical values to plug into this formula.

T (Average number of transactions):

Period: 3 months

Total transactions: 120

T = 120/3 = 40

AOV (Average Order Value)

Total revenue over a specific month (August): $10,000

Number of orders: 20

AOV = $10,000 / 20 = $500

AGM (Average Gross Margin)

– Calculate gross margin percentage per month

Gross Margin = [(Total Revenue – Cost of Goods Sold) / Total Revenue] * 100

Total revenue (August): $10,000

Cost of Goods sold: $8,000

Gross Margin (%) = [($10,000 – $8,000) / $10,000] * 100 = 33%

– Determine average gross margin for a three-month period.

Total Gross Margin = 0.87

Average Gross Margin = 0.29  

ALT (Average lifespan of a customer)

ALT = 1/ Churn rate

To measure churn rate:

You had 200 customers at the beginning of August and 150 customers at the end of September. The churn rate will be:

200 – 150) / 200 = 50 / 200 = 0.25, or 25%

ALT (Average customer lifespan) = 1 / 25% = 1 / 0.25 = 4 months

Now, we have all the values needed for our predictive CLV calculation:

Average number of transactions (T) = 40

Average Order Value (AOV) = $500

Average Gross Margin (AGM) = 0.29

Average customer lifespan (ALT) = 4 months

Predicted CLV  = (T * AOV * AGM *ALT) / Number of customers at the end of the particular period

Predicted CLV = (40 * $500 * 0.29 * 4) / 150 customers at the end of September

= $23,200 / 150

Traditional approach

Business growth is anything but linear. So, what happens when your sales per customer don’t stay the same year after year, and you need to consider the changes that happen across the customer’s lifetime? In this situation, you need a more in-depth CLV formula that takes margins, inflation, and retention rate into account and gives a more nuanced picture of how CLV changes over the years.

GML is the Gross Margin contribution per customer, which is the profit you expect to make over the average customer lifespan. It consists of revenue minus the Cost of Goods Sold.

R is the retention rate: the percentage of customers who stick with your business over a defined period.

D is the discount rate, which is included to account for inflation. Generally, a discount rate of 10% is used for SaaS businesses.

• Gross Margin Contribution per customer (GML)

Gross Margin = 0.29

Average total revenue = $1,000

GML = 0.29 * 1,000 = $290

• Retention rate

Suppose that for September you had:

Customers at the end of the month = 300

Customers acquired during the month = 50

Customers at the beginning of the month =  270

R = [(300 – 50) / 270] * 100 = (250 / 270) * 100 = 0.9 * 100 = 90%

• Discount rate: let’s take the standard discount rate of 10%.

  Now just plug the values into the CLV equation.

CLV = GML * [R / (1 + D – R)]

CLV = $290 * [0.9 / (1+ 0.1 – 0.9 )]

= $290 * (0.9 / 0.2)

= $290 * 4.5

Key takeaway

Successful subscription businesses regularly monitor their customer lifetime value and constantly strive to increase it. CLV offers companies an opportunity to refine their marketing and customer management strategies to increase customer retention rates and revenue. There are different approaches to calculating CLV. They all have their advantages and drawbacks, and the right approach depends upon the type of business you are running, the type of industry your company operates in, the tools you have to calculate your metrics, and the way you calculate your sales and marketing investments.

CLV is just a piece of the complex financial puzzle, but when compared with other metrics and combined with advanced analyses, it can be a powerful way to understand the value of your customers and make the most of their business.

Related Posts

• FAQs on MRR, ARR, Churn, ARPU and other Key Subscription Metrics
• What is Annual Recurring Revenue (ARR)? | Definition, Formula & Calculation of ARR - Zoho Subscriptions
• What is Customer Acquisition Cost (CAC)?
• What is Monthly Recurring Revenue (MRR)? | How to calculate it?
• What is Recurring Revenue Business Model? Types, Benefits & Challenges
• What is churn rate? - Types, Calculation & Industry benchmarks

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great content. just want clarity on the above calculation. how did u take ACL -36

Hi Tanya, Thanks for your feedback!

In step 4 of the “How to calculate CLV?” section, we considered an example where the Average Customer Lifespan (ACL) is 3 years, which we converted into months, hence, 36 months. This is purely an imaginary value that we considered to better illustrate the calculation.

However, as we mentioned in the article, this is the formula to calculate ACL. ACL = Sum of customer lifespans / Total number of customers

And if the business is relatively new and does not have the required sample size of customers to do the calculation, ACL can be derived through churn rate.

ACL = 1/Churn rate

Considering this scenario in our example, if we assume the churn rate to be 2.7%, then the ACL shall be 1/ 0.027 = 36 months.

thanks for this article, well explained 🙂

Hello, great article. Do you have a way to explain how to best price the cost of a subscription itself? Say, if a service is worth $50 each time it is done, what would be a good ” annual membership” cost where they have unlimited access to the service?

Hey Shweta, Thanks for your feedback. To answer your query, we have plans to come up with an article on subscription pricing strategy, which we think might help you. In the meantime, if you have any other queries, you can contact us at [email protected] . We’ll be happy to help you!

Hi Keerthana, Very well articulated and made it simpler, thanks for this article. You epitomized the saying “If you can’t explain it simply, you don’t understand it well enough”. Continue your good work.

It will be great if you can help me with a clarification on the calculation done for revenue from a given customer under the topic “Determine how much to invest in the acquisition”. I understand the value should be 1200 instead of 1800 as mentioned [(8+16+21)/3 * 10 boxes * 8 years = $1800].

Thanks Mohan.

Hi Mohan, Appreciate the feedback. To answer your question, the calculation includes 15 boxes and not 10 boxes as you have pointed out. So as mentioned [(8+16+21)/3 * 15 boxes * 8 years] will be equal to $1800. Please feel free to let us know if you have further doubts.

Good Article Keerthana … very useful

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Customer lifetime value: The customer compass

Traditional brand owners and retailers are increasingly encroaching into the e-commerce channel—and for good reason. After all, digital engagement with customers provides companies with valuable data on consumer behavior that allows them to optimize marketing and product development. In addition, by operating their own sales channel, providers retain control over user experience and brand image. Enter COVID-19, and suddenly the Internet is rapidly becoming the shopping channel of choice for more and more consumers, a trend that is likely to persist beyond the pandemic.

About the authors

This article was a collaborative effort by Max Ackermann , Karel Dörner , Fabian Frick, Marcus Keutel , and Philipp Kluge.

That said, the new e-commerce players also face a challenge: winning and retaining customers is an expensive affair. That is why it is crucial for success to invest primarily in those customers who are lucrative for the company in the long run. It is important to understand these customers intimately, to engage them with the right channels, and to tailor offers to their context and needs. This can only be achieved by drawing on customer-related metrics—of which customer lifetime value (CLV) is first among equals—and by interlinking them intelligently as the foundation for effective and efficient marketing.

“CLV is our core steering metric” Four questions for Emmanuel Thomassin, Chief Financial Officer of Delivery Hero

Just how important is clv for delivery hero.

Customer lifetime value is one of our core metrics. It’s a topic we’re driving intensively at all levels of the organization and we have set clear goals from which we can only deviate in exceptional cases. We use CLV to support our strategic and operational decisions, such as whether to enter a new market or whether to continue or end a marketing campaign.

So how do you go about that?

We have a standardized approach for all our markets. CLV monitoring is directly linked to our operational marketing systems and thus directly influences our investments. It is crucial to continuously adapt and improve the calculation of CLV and the corresponding operationalization in marketing. Initially, for example, we only calculated the cost of customer acquisition; meanwhile, we also know what it costs us to retain customers. Over time, we have learned an enormous amount, especially through monitoring in new markets and with the introduction of new business models.

Do you see a trend among your customers?

Perhaps the most important KPI-based analysis is breaking down customers into cohorts to fine-tune the targeting of marketing drives. Over the years, we have seen CLVs rising steadily across all our cohorts, even before Covid. Today, they are many times higher than the investments in customer acquisition and retention. This shows that our marketing measures, among them personalization, have a direct impact on the KPIs and thus on Delivery Hero’s success.

Do you still see untapped potential in the way you use CLV?

A major challenge is responding directly to improvements in the KPIs with measures designed for pinpoint accuracy, especially in marketing, and then evaluating these with precision. That’s something we are working on, aside from further refining our analytics and increasing their granularity to the level of geographical micro-cells.

Digitally aligned companies and start-ups have long been successfully applying and refining this approach (see sidebar, “‘CLV is our core steering metric,’ Four questions for Emmanuel Thomassin, Chief Financial Officer of Delivery Hero”). Many traditional manufacturers and retailers, on the other hand, still have some catching up to do. To make the most of the CLV approach and use it to manage their e-commerce business, they should adopt a long-term strategy and proceed systematically in three steps: collect data, determine true customer value, and target investments to the most valuable customers.

Collect data throughout the customer journey

To estimate the current and future value of customers and keeping privacy regulations in mind, companies need to collect relevant data points on as many customers and their behavior as possible over multiple years. This is because the corresponding analytical models are dependent on the availability of sufficient amounts of information to identify relevant patterns. The greater the volume of data available, the more meaningful and accurate the analyses. Three categories of data are required:

• Transaction data such as shopping timeline, product information, prices, method of payment, delivery, or returns are supplied by the e-commerce platform and the connected financial systems.
• Demographic data such as gender, age, occupation, and place of residence are condensed into customer profiles in order to better predict future shopping behavior and personalize marketing actions.
• Marketing data such as search behavior, response to campaigns, and external online data help to flesh out the respective customer profile and, in turn, deepen customer knowledge, including as regards preferences or purchasing behavior.

Despite ample data, it is often difficult to clearly identify customers throughout the entire customer journey. This is partly due to purchases made across different channels, for instance, in the company’s own online and offline stores or perhaps through third-party suppliers such as retail partners, which often do not require registration (with an e-mail address, etc.) for identification.

Successful providers solve this problem with an integrated customer database (customer data platform) that can recognize customers even when they do not sign in. For this purpose, profiles comprising as many attributes as possible are created for visitors to the various channels (based on browser data, among other things). Then, returning visitors (including to different channels) are identified by matching them against the full array of profiles compiled. Aside from linking different data sources and formats, the customer data platform also enables the integration of suitable external systems as well as customer segmentation according to behavior and demographic data. Key steps in this context include anchoring the system’s continuous improvement, but also data use by the organization’s departments from the outset.

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Determining the true value of customers.

What happens to the data collected? Here, in the second step, is where customer lifetime value (CLV) comes into play. This is because it can be used to measure a customer’s value, in the long term, over their entire time as a customer of the company. This value is compared with the customer acquisition/ retention costs (CAC), i.e. the marketing investments made or planned that are necessary to acquire and retain the customer. Finally, both indicators are linked to derive recommendations for action with regard to strategic and operational decisions (Exhibit 1).

A distinction is made between three levels of complexity when modeling CLV and CAC:

The descriptive model calculates CLV using historical consumer data and identifies behavioral patterns of customer groups mostly through simple manual analysis. This comparatively simple method yields rapid results, but they are merely hypotheses and therefore of limited value; they can only serve as an initial indicator of CLV for potential decisions.

The predictive model uses historical data patterns to determine future CLV. Consequently, the results are more accurate and meaningful as the customer’s individual profile is factored into the equation along with their remaining time as a customer. Backed by this knowledge, CLV managers can make more effective decisions. However, this model requires more comprehensive advanced analytics capabilities, such as customer identification across multiple channels. For a 360-degree view, it is worth having complete historical customer data as well as regular updates of sales and cost data.

The operative model goes one step further: it automatically predicts CLVs using machine learning and makes initial recommendations for decisions, amplifying the CLV effect. In addition, predictive accuracy and decision making improve with each update. For the operational teams, this means that rather than elaborating decision recommendations, their primary job is to review and continuously monitor them. Yet, creating such models is a much more complex endeavor that can take months, if not years.

For all three models, continuous updating data and calculations is indispensable. For example, CLV must be adjusted after each customer purchase, but the CAC value must also be increased if, for instance, a marketing campaign is launched for a specific customer group. This is essential so that the data and the associated analytics results can be used for future campaigns.

Targeted investment in high-value customers

The last and most important step is to evaluate the CLV and CAC computations in such a way that the company can derive strategic and operational recommendations for action and decisions from them. It is essential to consistently measure the impact of the respective decisions, for example, the increase in CLV as a result of certain marketing measures.

With regard to the depth of evaluation, a distinction can be made between three levels. At the first level, only the average of all customers is considered, although this can already be very helpful when making decisions about expansion into new markets, channels or brands, for example. As a rule of thumb, expansion is advisable as soon as the estimated CLV exceeds the CAC by a multiple—even if profitability has not yet been reached. In practice, mature digital business models should display CLV-to-CAC ratios ranging between at least 2:1 and up to 8:1 or more. At this level, CLV can also be used as a metric to measure and improve the performance of organizational units such as country branches, or to gain a more customer-focused perspective on the business (rather than a purely sales- and profit-centric view).

The next analytical level focuses on cohorts of customers clustered on the basis of their CLV and CAC values in order to improve operational decisions in particular. Demographic data, such as gender, age, place of residence, but also behavioral data such as purchase frequency, brand loyalty, and returns are typically taken into account.

These data sets help marketing and sales teams identify indicators of high CLV and low CAC respectively, and tailor marketing campaigns to individual cohorts. Exhibit 2 illustrates an example of such a cohort analysis: in addition to the distribution of customers among the various CLV levels, it shows the characteristics of less lucrative and particularly valuable customers, as well as the recommended actions that can be derived from them.

Finally, at the third level with maximum analytical depth, the model targets individual customers. However, this only makes sense if the company is operating advanced, automated marketing platforms. Otherwise, individual marketing efforts would be prohibitively expensive and the cost of acquiring and retaining customers would skyrocket.

In a nutshell, CLV offers both established and new players in the e-commerce space the opportunity to better understand, target, and serve their customers in order to engage them in an effective and efficient manner, and create value for them. However, the operationalization of CLV and CAC can also set in motion entirely new developments. For example, successful e-commerce companies are moving to build a network of physical stores to operate in tandem with their online business. Take, for instance, Mr. Spex, Europe’s largest online eyewear retailer, which is opening more and more stores in German cities to attract new customers and create an omnichannel experience. A response to the rising cost of customer acquisition and retention in the online channel in recent years, this trend capitalizes on the fact that it is often cheaper and more efficient to strike the desired CLV-to-CAC ratio in conjunction with offline channels.

Max Ackermann is an associate partner in McKinsey’s Berlin office; Karel Dörner is a senior partner in the Munich office, where Dr. Philipp Kluge is an associate partner; Marcus Keutel is a partner in the Cologne Office; and Fabian Frick is a project manager in the Frankfurt office.

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Lifetime Value (LTV)

What is lifetime value (ltv).

Lifetime value (LTV) estimates how much revenue a customer represents a business over the life of that relationship. Also called customer lifetime value (CLV, or CLTV), this is a critical metric for a company trying to gauge the cost efficiency of acquiring new customers and supporting them over time.

Why Is Knowing Your Customers’ Lifetime Value Important?

Understanding the LTV of your customers can provide valuable insights to help you run your business more effectively and profitably. Here are a few examples.

It tells you if you’re connecting with your market.

Several metrics can give you a sense of whether your products or your company are resonating with customers. One example is your Net Promoter Score (NPS) . But most of these metrics, including NPS, give you only an indication of how positively (or negatively) customers feel toward your company. Those feelings don’t always translate directly into revenue and profit.

Obtaining an accurate estimate of customers’ LTV gives you a much clearer picture of your products, marketing, and sales processes, and how your brand is translating into long-term revenue.

It tells you when a customer will become profitable (which could take longer than you think)

Suppose a business focuses only on the revenue generated by a new customer’s first purchase. In that case, it could make a strategic error in deciding that a given product, marketing campaign, or customer segment is not profitable. But what if many of those customers will go on to buy more from that business over time?

In reality, the marketing campaign or initial purchase that brings your customer in the door could lead to a profitable long-term relationship, even if it appears to be a money-losing venture in the short term. You will learn this only if you project your customers’ lifetime value.

It tells you which personas to invest in

Different segments of your customer base will represent different LTVs to your company. Knowing this will help you allocate resources for product development, marketing, operations, and other costs more intelligently. You will be able to devote more resources to the segments of your user base that will deliver more revenue to your business over time.

How Do You Calculate LTV?

According to Amazon’s Alexa blog, the basic LTV formula looks like this:

How Can You Increase Your Average Customer’s LTV?

Here are a few best practices for boosting LTV.

1. Improve your onboarding process

One reason your customer LTV might be lower than it should be is that new customers find your product challenging to learn and use. If you sell a SaaS application, for example, the ease of your onboarding process is critical. Customers who become frustrated the first few times try to familiarize themselves with your product are less likely to stay with that product for long.

By contrast, a user-friendly and pleasant onboarding experience can make new customers immediate fans of your products and your company. That can lead to several positive follow-on effects. These customers will be more likely to stick with your product for the long term. They’re more likely to become champions of your product to coworkers across their company. They’re also more likely to be interested in the other products you offer.

Dive Deeper:

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2. Deliver outstanding support

Another way many businesses undermine their LTV is by failing to provide excellent support for customers. A key strategy for maintaining a long-term relationship with customers is to make sure your team is there for them when they need help.

This is why it’s essential to make sure your customer support is world-class. As a product manager or product leader, you can do this by making sure your support team receives training and information on new products and all updates to existing ones. We recommend involving members of the support team in your product, sales, and marketing discussions more often. This will help your support reps better understand who your customers are and what problems they’re buying your products to solve.

All of this will help make these reps more effective and empathetic when customers call—which will increase the likelihood that they will stay customers over a longer timeframe.

3. Surprise and delight your customers

One final suggestion for increasing average LTV is to periodically give your customers something positive that they aren’t expecting. Suppose you sell a B2B SaaS app, for example. In that case, you might want to automatically upgrade longer-term customers to a higher-level service, or let them know you’re giving them free use of a new widget be selling to new customers.

This is particularly valuable for accounts whose usage has fallen off. Those are the customers likely to cancel their subscriptions or, at best, not renew them when the current term expires.

But for any customer, delivering a positive surprise now and then is a great way to keep that relationship going—and add to that customer’s LTV.

Related Terms

customer acquisition cost (CAC) / churn / monthly recurring revenue (MRR) / key performance indicator (KPI) / product-market fit

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What is customer lifetime value (clv) and how can you increase it.

15 min read Customer lifetime value (CLV) is one of the key stats to track as part of a customer experience program. Customer lifetime value is a measurement of how valuable a customer is to your company, not just on a purchase-by-purchase basis but across entire customer relationships. Learn how to calculate customer lifetime value and increase your customer ROI with our guide.

What is customer lifetime value (CLV)?

Customer lifetime value is the total worth to a business of a customer over the whole period of their relationship with the brand. Rather than looking at the value of individual transactions, this value takes into account all potential transactions to be made during a customer relationship timespan and calculates the specific revenue from that customer.

There are two ways of looking at customer lifetime value: historic customer lifetime value (how much each existing customer has already spent with your brand) and predictive customer lifetime value (how much customers could spend with your brand). Both measurements of customer lifetime value are useful for tracking business success.

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Historic customer lifetime value

If you’ve bought a $40 Christmas tree from the same grower for the last 10 years, for example, your customer lifetime value has been $400 – pretty straightforward. This is an example of historic customer lifetime value – a measure that works by looking back at past events. It’s helpful to understand what an existing customer has brought to your brand and for building profiles of ideal customers, but it’s not as useful for predicting future revenue when considered alone.

Predictive customer lifetime value

You can also calculate predictive customer lifetime value . This is an algorithmic process that takes historical data and uses it to make a smart prediction of how long a customer relationship is likely to last and what its value will be. It can take into account customer acquisition costs, average purchase frequency rate, business overheads and more to give you a more realistic customer lifetime value prediction. It can be a more complex way to calculate customer lifetime value, but it can help you to see when you need to invest in your customer loyalty.

How is customer lifetime value different from other customer metrics?

Customer lifetime value is distinct from the Net Promoter Score (NPS) that measures customer loyalty , and CSAT that measures customer satisfaction because it is tangibly linked to revenue rather than a somewhat intangible promise of loyalty and satisfaction.

It’s a confirmed understanding of how much loyal customers bring to your business financially, or in the case of predictive customer lifetime value, how much they are likely to bring based on past data.

Knowing existing customers’ lifetime values helps businesses to develop targeted strategies to acquire new customers and retain existing ones while maintaining profit margins. Read on to understand why customer lifetime value is a key metric to track, and how to calculate and improve on it.

Why is customer lifetime value important to your business?

It helps you save money.

Customer lifetime value is an important metric to track, as it costs less to keep existing, loyal customers than it does to acquire new ones. Recent research has found that even in sectors with potentially easier customer acquisition, such as e-commerce, t here’s been a 222% increase in costs for new customers over the last eight years.

Focusing on increasing the current customer lifetime value of your existing customers is a great way to drive growth. Rather than relying on new customers (and spending lots to get them), you can figure out what keeps your customer base loyal and replicate your actions for increased value with existing customers.

It helps you spot and stop attrition

Customer lifetime value is a great metric to use to spot early signs of attrition and combat them. Let’s say you notice that customer lifetime value is dropping, and pinpoint that customers are neglecting to sign up for a continuation of an ongoing subscription of your product or service. You might decide to launch or improve a loyalty program to tempt customers back, or provide better customer support or marketing efforts around renewal times to help encourage customers to sign up again. This will help to increase customer lifetime value and business revenue again.

It helps you find your best customers and replicate them

Your best customers will have a higher customer lifetime value, and through careful analysis you’ll be able to understand the commonalities between these individuals. What drives them to buy into your brand again and again? Is it a common need, a particular income bracket, a specific geographical location? You can define a whole customer segment based on these higher value existing customers alone.

Once you’ve analyzed the drivers for high customer lifetime value and created a buyer persona specifically for this type of customer, you can seek out new customers using this information. Once you’ve got them on board, you have your predictive customer lifetime value to rely on for future revenue.

How much are your existing customers costing you?

Customer lifetime value goes hand in hand with another important metric – CAC (customer acquisition cost). That’s the money you invest in attracting a new customer, including advertising, marketing, special offers and so on. Customer lifetime value only really makes sense if you also take the customer acquisition cost into account.

For example, if the customer lifetime value of an average coffee shop customer is $1,000 and the customer acquisition cost is more than $1,000 (using advertising, marketing, offers, etc.) the coffee chain could be losing money unless it pares back its customer acquisition costs.

Another factor in the equation is Cost to Serve. This is part of the cost of doing business, and it involves everything you do to get the product or service into the customer’s hands and doing what they need it to do. For example, logistics, overheads in your physical location, contact center costs and so on.

Breaking this down by customer can help you understand these costs on a granular level, and dig into details like whether your customers with a higher customer lifetime value cost the same as the low ones, and whether some customers are more expensive than others. If the cost of serving existing customers becomes too high, you may be making a loss despite their seemingly high customer lifetime value.

Cost to serve may vary across the customer lifetime, unlike customer acquisition which is a one-off expense. To use a paid TV subscription as an example, your cost to serve might be higher in the first year of a contract but gradually drop off the longer the customer stays with you. Thus, if your renewal rates drop, your average cost to serve is likely to rise and cause a drop in profitability.

Understanding these numbers over time and being able to track them side by side is the only way to get a true understanding not only of what’s driving customer spend and loyalty but also what it’s delivering back to the business’s bottom line.

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How do you calculate customer lifetime value (CLV)?

There are a couple of factors that go into how you calculate customer lifetime value – we’ve laid them out below.

A simple customer lifetime value formula

The simplest formula for measuring customer lifetime value is:

Customer revenue per year * Duration of the relationship in years – Total costs of acquiring and serving the customer = customer lifetime value

This formula is suitable for situations where the figures are likely to remain relatively flat year-on-year.

There are other useful formulas that can help you to calculate customer lifetime value. Read our helpful guide to calculating customer lifetime value to understand what these formulas are and how to apply them.

Other important factors for your customer lifetime value calculation

As you can imagine, in bigger companies with more complex products and business models, customer lifetime value gets more complicated to calculate.

Some companies don’t attempt to measure customer lifetime value, citing the challenges of segregated teams, inadequate systems, and untargeted marketing.

When data from all areas of an organization is integrated, however, it becomes easier to calculate customer lifetime value more accurately.

Customer lifetime value can be measured in the following way:

• Identify the touchpoints where the customer creates the value
• Integrate records to create the customer journey
• Measure revenue at each touchpoint
• Add together over the lifetime of that customer

How to improve customer lifetime value (CLV)

Customer lifetime value is all about forming a lasting positive connection with your customers. So it naturally follows that the way to boost your customer lifetime value figures is to nurture those customer relationships. Here are a few ways of doing that.

Invest in customer experience

Customer experience is made up of every instance of connection between a customer and a brand , including store visits, contact center queries, purchases, product use and even their exposure to advertising and social media. Improving the experience is a business-wide endeavor that’s often addressed using a customer experience management program . This is a process of monitoring, listening and making changes that add up to a lasting improvement in how customers feel and their tendency to be loyal over the long-term.

Ensure your onboarding process is seamless

Customer experience starts the moment a potential customer encounters your brand, but often companies can forget that customers need care after the purchase. Make sure your onboarding process is optimized for your customers’ needs, and it’s as simple and easy as possible for minimal customer effort . Personalization and communicating the extra value you provide to your customers should be a priority. You should also remember that how you treat your customers during the onboarding process is how they expect to be treated ongoing, so make sure your customer experience reflects this.

Start a loyalty program

A loyalty program incentivizes repeat business by offering discounts or benefits in return. A loyalty program might take the form of a loyalty card or app, or a points system that customers accrue when they make a purchase. Although it’s not a silver bullet for customer retention , a loyalty program can yield great results when it’s planned and executed well.

Recognize and reward your best customers

With your customer experience management program up and running, you’ll already have some ideas about which customers are likely to have the best customer lifetime value. You can nurture your relationships with these individuals or groups using targeted marketing and special offers that recognise their loyalty. This could include free expedited shipping, top-tier benefits in your loyalty program, or access to exclusive or pre-release products and services.

Provide omnichannel support

Your customers will have a variety of preferences for how they engage with you, so your support channels need to reflect this. Do your research to find out which channels your particular customer base prefers, rather than just offering what you think they’ll want to use. Get customer feedback on self-service options and frontline interactions to provide a great customer experience with omnichannel support.

Remember the power of social media

Social media is increasingly important not only for customer communication, but for customers to gather information on your brand and public image. If customers feel as though your social media responses to a query or issue aren’t fast enough, thorough enough, or empathetic, this will affect the opinion the customer has of your brand moving forward. Make sure you factor in social media – mentions, and responses into your customer experience strategy.

Close the loop with unhappy customers

Closed-loop feedback is a powerful way to reduce unwanted churn and turn dissatisfied customers into newly loyal ones. In this model, businesses proactively reach out to detractors o r complainants and intervene before issues can escalate and lead to a breakdown of the customer relationship. In many cases, this targeted effort and active listening on the part of the business actually makes the relationship stronger than it was originally. It’s a valuable extension of your customer experience management program.

Making customer experience a vital driver of customer lifetime value

Ultimately, you don’t need to get bogged down in complex calculations – you just need to be mindful of the value that a customer provides over their lifetime relationship with you. By understanding the customer experience and measuring feedback at all key touchpoints, you can start to improve on the key drivers of customer lifetime value.

At Qualtrics, we believe that customer experience is a vital reason why customers return to a brand again and again. By focusing on customer experience, you’re able to easily increase customer lifetime value – we’ve found that customers who rate an experience 5/5 stars are more than twice as likely to buy again, and 80% of satisfied consumers will spend more.

Make accurate predictions for future revenue based on a holistic view of your customers’ relationship with your brand. See customer acquisition costs and more data alongside the results of customer satisfaction surveys and more on one integrated dashboard.

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Customer Churn & Retention

Calculate CLV 13 min read

Customer retention 20 min read, customer loyalty programs 12 min read, customer loyalty 18 min read, customer churn 20 min read, customer retention surveys 5 min read, churn reduction 15 min read, request demo.

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How to Calculate Customer Lifetime Value (LTV) and Increase Customer Value

Business Academy Metrics 101

Table of Contents

More glossary articles.

Of all the metrics you need to track as a SaaS company, lifetime value (LTV) may be the most mysterious. It feels difficult to calculate, and then once you have the calculation, you don’t really know what to do with it whether it’s good or bad.

Hopefully today we can demystify the metric and offer some insight to help you use that metric better within your company!

Table of contents:

• What is lifetime value?
• How to calculate LTV

Churn variance and sample size

• CAC and LTV
• LTV and churn
• How to increase LTV

What is customer lifetime value?

Customer lifetime value (CLTV) is the predicted revenue generated by a customer over the entire relationship with the company, or "customer lifetime". This metric is very useful for making predictions and long term plans, as you'll want to balance CLTV with other factors like customer acquisition cost.

This way, the CLTV metric can help you move from transaction-based thinking to focusing on the long-term value of repeat business.

Say you charge $100/mo for your service and a customer stays with you for 12 months. Their LTV would be $100 × 12 = $1,200.

How to calculate customer lifetime value

The example above is how you’d calculate LTV for a single customer. But that obviously isn’t practical for running your business (since you hopefully have more than one customer).

To measure LTV, we’ll need two additional metrics:

1. Churn rate : This is the number of subscribers that unsubscribed or stopped paying in a given period of time.

Example: If you had 100 subscribers last year and lost 5, your churn rate is 5%.

2. Average Revenue Per User (ARPU) : This is the average revenue of all your current accounts. Or, MRR/total users.

Example: If you have 100 accounts, and from 50 of them you made $50 per year, and from the other 50 you made $100 per year, then your ARPU is $75 yearly.

Now, let’s take a look at how to calculate the lifetime value of a customer.

Customer lifetime value formula – LTV Formula

LTV = ARPU (average monthly recurring revenue per user) × Customer Lifetime

You can also calculate lifetime value using churn (which is a number you likely have more readily available).

LTV = ARPU / User Churn

The higher your user churn, the lower your lifetime value will be. You can see why paying attention to both LTV and churn is so critical.

Luckily, you don’t have to manually calculate customer lifetime value. If you use a SaaS analytics tool like Baremetrics, you can track and analyze your LTV growth over time!

Quite often, churn can be messy. For example, if you think about any given cohort (a group of users that subscribed in a given period – i.e., all subscribers gained in July), there’s often a “cliff,” right after the first month of that cohort’s start date.

To keep this churn variance accounted for, we can multiply our results by a discount rate. (Discount rate means “discounting” for cash flow losses that may occur in the future).

Use a discount rate of .75 to find a more conservative estimate:

((ARPU x Profit Per User)/Churn rate) x .75ex. $1200 x .75 = $900

Sample size is also important, and unfortunately, the scientific method often falls by the wayside in business.

If you don’t have many users, or you’re counting too few users in your metric calculations, then your data may not be scientifically valid.

Here are the scientific guidelines for sample size:

• Less than 100 users: 50% or more user data needs to be counted for valid data (100% is best)
• 1,000 to 10,000: 10% of user data needs to be counted for valid data, (i.e., if you’ve got 5,000 users then you need to include the data of at least 500 users in your calculations).
• More than 1 million: 1% of user data need to be counted for valid data, (i.e., if you’ve got 3,000,000 users then you need to include the data of at least 30,000 users in your calculations).

Customer acquisition cost and lifetime value

The primary reason the Lifetime Value Calculation is so important for your SaaS business is that it drives what you can spend to acquire new customers. If your customer acquisition cost (CAC) is $100 and that same customer has an LTV of $500, you’re basically printing $400.

Can you say “money machine”?!?!?!

The higher your LTV and the lower your CAC, the faster you can grow your business.

If you know how much a customer’s value will be over the course of a lifetime, then you can make smarter decisions about what to spend to acquire a customer.

A good rule of thumb is that if LTV/CAC isn’t above 3 , you’re spending too much on acquisition.

LTV and Churn

The reason those LTVs will likely be so different is because of one nasty word: churn.

Generally speaking, users on your lowest-priced plans will also have the highest churn, making it your most dismal LTV compared to the other plans.

And remember what we said earlier? LTV drives what you can spend to acquire customers. If the average customer takes $200 to acquire, it makes no sense to spend that to get a customer with an LTV of $100.

Knowing what your LTV is for each customer segment is critical.

This is something  Baremetrics (SaaS analytics & insights) offers right out of the proverbial box, available as soon as you connect your account.

How to increase customer lifetime value

Knowing your average customer lifetime value is nice. But just looking at a number on a graph won’t help you grow your business.

Unless you do something with the KPIs you’re tracking, they’re pointless.

So next, we’re going to talk about how to use lifetime value analysis (it’s easier than it sounds) and other tactics to improve your LTV. 

Interview your customers with the highest lifetime value

When your goal is to improve your customer lifetime value, a good place to start is speaking to your existing customers.

So for this first tactic, you’re going to identify the customers with a higher lifetime value than your average, and learn more about them.

Specifically, you want to learn:

• Where they get the most value from your product
• How they use your product
• What initially drew them to you (and how they found out about you)
• How they’ve grown with your product since the time they signed up
• Any other insights that’ll help you understand what’s keeping them around

Step one is to find out what your current average LTV is. I’ll grab ours from our Metrics dashboard.

Then, head over to your customer list. We’ll need to set a couple of filters:

• Active customer: Ideally you want to speak to active customers. Reaching out to people who canceled could get a little awkward.
• LTV: Filter to only show customers with an LTV that’s higher than the average you found (in our case, higher than $5,244).

Now, you should have a list of your highest LTV customers.

From here, you can reach out to them and ask if they’d be open to doing a short interview to learn more about how they use the product and get feedback.

Here’s an example of what your email might look like:

Subject:   {first name} ,  {your company} hand picked you!

Hi {first name} ,

Thanks for being a long-time {your company} customer! I’m trying to learn more about how our customers use {your product} and since you’ve been such an amazing customer, I was wondering if you’d be interested in helping? Could you spare 15 minutes for a quick call to answer a few questions? In exchange for your time, we’ll take 10% off your next bill. You can grab a time on my calendar here {link} . Hope to hear from you soon!

{signature}

You don’t have to give 10% off, or any discount actually. But if you can offer them something in exchange for doing the interview, you’ll get more people to opt-in.

And always include a link to schedule a time for the call with something like Calendly or Doodle. That way it’s super simple for them to set it up.  

Then just start gathering the feedback and organize it in a spreadsheet. Look for trends that you can use to improve the LTV of your other customers.

For instance, if you notice most of these customers came from a specific channel (SEO, Google Ads, email, etc.) then you know to invest more in those channels.

Or maybe most of them use a specific feature of your product. You can start marketing that feature more since customers get the most value from it. The interviews can be a huge helping hand in how you develop and market your product going forward.

Compare lifetime value by customer segment

You’re probably starting to notice a trend here. Looking at your LTV as a single number is nice to give you a 10,000-foot view. But in order to make it more actionable, you need to break it down into smaller groups so you can identify trends.

Because all customers are not created equal.

You need to know what the LTV is of each major customer segment. For SaaS companies, that’s usually the various price points you offer.

Joe on your $30/mo plan will almost certainly have an LTV that is a fraction of what the LTV is of Sally on your $200/mo plan. And not just because $200 is more than $30.

You can see your LTV by plan-level in Baremetrics.

As you can see here, there’s a pretty obvious trend. Our lowest plans have significantly less LTV, despite having the most number of customers.

This is pretty common for SaaS companies. Customers on lower-priced plans tend to churn more, and they pay less. And customers on our higher-priced plans tend to stick around longer and generate more revenue for us.

Using that data, it’s clear to see that it’s worth our time to figure out how to get mid-large sized customers if possible.

Pricing plans are only one way to segment your customers though. In Baremetrics, you can create segments based on location, acquisition source, when they signed up and tons of other criteria.

For instance, we can compare the LTV of our US and Canadian customers.

As you can probably tell, you can get really nerdy here and slice the data in a ton of different ways.

But the focus should be to identify which segments have the highest LTV, so you can get more customers like them.

Reduce your overall churn

If you look back at the customer lifetime value formula, you’ll notice it’s a function of two things:

• How much money customers spend with you
• How long they remain customers

So, the longer you can keep your customers paying you, the better chances you’ll have of increasing your average customer lifetime value.

For this, we need to look at user churn time. How long do customers stay with you before they cancel?

The first thing to note is whether or not your customer churn is high. If you use Baremetrics, a good way to tell how your churn time compares to similar companies is through our Benchmark.

Benchmarks will show you how your metrics compare to companies with a similar average revenue per user (ARPU) as you.

Take note of where you fall in both the user churn and customer lifetime value benchmarks. If you’re in the lower quartile for both, then there’s a good chance your churn rate is probably a problem.

Luckily, we’ve written a ton of articles about how to reduce churn and improve your retention rate:

• 6 Proven Strategies to Reduce Churn (With Real Examples)
• Three Step Guide to Analyzing Customer Churn
• Customer Churn: How to Calculate & Reduce It
• 5 Ways to Prevent Involuntary Churn in SaaS
• What is Negative Churn? (And How to Achieve it)
• How to Use Cohort Analysis to Reduce Churn & Improve Retention

Between all those resources, you should be well on your way to lowering your customer churn in no time!

Increase your ARPU

Now let’s talk about the second part of the lifetime value equation—revenue per user.

Since churn is inevitable, you don’t want to rely solely on reducing that percentage. You also need to figure out how to get more revenue per customer. Like you saw in the example I gave earlier, customers who pay less tend to have a lower LTV than higher paying customers.

Keeping things simple, the two main ways to increase ARPU are:

• Raising your prices
• Expansion revenue

I know raising prices is a touchy subject for a lot of founders. But the reality is pricing your product too low is a good way to stunt your growth.

You’ll have to do a good amount of testing before you make any dramatic changes to your SaaS pricing, but it’s something worth looking into if your growth has been at a standstill for a while, and your LTV isn’t growing.

The second tactic is a little less scary. Customer expansion is all about increasing the revenue you earn from existing customers through:

• Upgrading them to higher priced plans
• Cross-selling complementary products
• Offering add-ons to improve their current subscription

If you’re interested in learning more (and I highly suggest you do), I wrote an entire guide about customer expansion: How to Use Customer Expansion to Skyrocket Growth

Set a customer lifetime value goal

I saved this one for last because if put it first you probably would’ve scrolled right past it! But stick with me for a second.

I know the infamous Harvard study that states people that set goals are 10X more likely to succeed than those who don’t has been discredited, but let’s set that aside.

If you’re a person that likes to actively work towards something, setting goals can be very motivational. Goals force you to create a strategy in order to achieve them. So just by setting a goal, you’re planting the seeds to take action.

You can set a goal right inside of Baremetrics.

When you’re setting goals, make sure there’s some logic behind it. Rather than just picking arbitrary numbers.

A good way to do this is to look at your historical numbers. For instance, here’s a look at our LTV over the past 24 months compared to today.

We can see that in 12 months, it’s fallen by 25%, and all the changes have generally been within 20% over the past 24 months. So setting a goal to increase it by 50% in the next two months probably wouldn’t be very reasonable. 

But a goal to get it up 10% each month would be more in line with what’s possible.

What’s your customer lifetime value?

Lifetime value is more than just another SaaS metric . It says a lot about how your product is priced and how much value customers get from your product.

It’s important to not only track it, but also analyze it so you can improve it. 

If you have no idea what your company’s LTV is, or you don’t have a tool that allows you to do the level of analysis I went over,  get a free trial of Baremetrics to get started .

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• How is LTV calculated and what formula is used? LTV is calculated using churn rate and average revenue per user. The formula is: Customer lifetime value formula - LTV Formula LTV = ARPU (average monthly recurring revenue per user) × Customer Lifetime

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14 Proven Tactics to Increase Your Customer Lifetime Value (CLV)

There are two ways to grow your business. The first is to acquire new customers. The second is to focus on retaining existing clients and increasing their lifetime value (CLV).

Data shows that the second is a far more effective strategy for producing a steady, predictable increase in revenue.Despite this, sources disclose that 44% of companies spend more time and money on acquiring customers, whilst only 16% of businesses focus on reducing churn, putting upfront the old wisdom that it’s cheaper to retain and delight an existing customer than to find a new one.

Don’t forget – the longer you can keep a customer, the greater is the provided value during their lifetime relationship with your brand. Here’s where the term customer lifetime value comes forward.

What Is Customer Lifetime Value?

Here’s the simplest customer lifetime value definition – it’s a metric that shows how much net profit your company can make of one customer over time .

So, a high CLV means each customer will bring in more revenue for your company. Since each client becomes more valuable, it means your company can afford to spend more to acquire new users and retain the existing ones.

Let’s say you run a classic, pure-play SaaS service with monthly billing. We’re going to be using a single customer as an example, one who stays with your business for 2 years, and who got a subscription plan priced at $100/month.

The average customer lifetime value of that client would be $2,400 ($100 times 24 – the number of months that person has been a customer). That number only gets higher as the client gets to pay more over time, the expansion revenue from existing customers exceeding the churn.

For more valuable insights, customer lifetime value measurement should be done using both: an average revenue and an average profit. Each can provide important data on how customers are responding to your product and how to efficiently adjust your marketing efforts. 

How to Increase Customer Lifetime Value?

Increasing your CLV can be as simple as switching your billing cycle from monthly to yearly, or as tough as overhauling your customer support process. Below, we’ve listed 14 proven tactics to increase your average CLV and generate more revenue from your existing customers.

1. Improve the Onboarding Process

When it comes to Customer Success, onboarding is the process you should spare no effort on in order to ensure sustainable business growth. It should be among the top priorities as poor onboarding occurs to be the leading cause of churn, 23% to be more specific .

It’s here that your customer really engages with your product and where you can make the greatest positive impact. This being said, it’s extremely important to put together a strategic onboarding process to encourage new users coming back for more, and thus increase their lifetime value to your company.

The process can be different, depending on the industry, customer needs or desired outcomes. However, there are a few key tips that most businesses use to engage their audience and increase adoption .

First and foremost, one must make the onboarding as easy and fast as possible. This can be done by simplifying the process with walkthrough guides, interactive how-to videos, wrapped tutorials and other content that might help customers in fulfilling their goals.

Consider personalizing the onboarding sequence by tailoring it to the buyer persona. Focus on communicating the value of your offering right from the start. Test onboarding approaches and monitor the customer health score based on their behavior.

Whatever option you go for, make sure it is straightforward enough to be understood and encourages engagement.

2. Provide Value-Packed Content That Keeps Customers Engaged

Email marketing is one of the best ways to retain customers, but many businesses go about it the wrong way. Instead of sending value-packed content, they run automated drip campaigns without offering any value.

The best type of emails to send to your customers are the ones that emphasize your product/service value :

• If you provide accountancy services, send a weekly or monthly email telling clients how much money you’ve helped them save that month;
• If you provide help desk software, send a monthly email to clients informing them how many support tickets they successfully solved;
• If you sell an environmentally friendly product, email your customers to tell them how much less carbon dioxide they’ve produced by using a competing product.

Every product or service delivers value. The key to an effective message is to find that value and present it to your customers in a way that shows your contribution . An email that explains the benefits you bring in goes a lot further – from a CLV perspective – than another promotional email.

Another means to be taken up is educational content. This type of message is based on the personalized sharing of knowledge. The key here is personalized . This is the moment when you need to get rid of sales pitches, look into specific customer needs, and suggest ways to solve their problems using your service/product.

Your main goal is to map the customer journey , identify the touchpoints, and, on this ground, send out highly targeted personalized campaigns to make yourself visible as a reliable source of knowledge. Be there for your customers, always ready to help, and they will reward you accordingly.

3. Offer High-End Customer Service

Quality customer service is a necessary investment to help your business grow and increase retention. If your service is below average, customers will defect to competitors even if your product is above average. Data reveals that one-third of consumers are likely to switch brands after a single instance of poor customer service.

As such, it’s important to get customer service right. Better customer service equals a better customer experience. In turn, that will make your existing customers more likely to become loyal long-term clients.

But how do you offer top-notch customer service that boosts customer retention and increases customer lifetime value? Well, here are a few recommendations you should consider:

Offer Omni-Channel Support

As a business, it’s important to be active on as many channels as possible. Cross-channel interactions accounts for a significant impact on customer retention (58%) and advocacy (55%).

Most people own more than one device – in the US alone, 98% of people switch between devices on a regular basis . Not to mention that around 66% of customers use at least 3 different communication channels to contact support.

Ideally, you should look into which channels your clients use the most . Maybe they’re more active on Telegram and Twitter while you only offer email and phone support. Once you know, make sure your support team is properly trained in using all those channels, or – if money allows it – put together different teams responsible for each channel.

Provide 24/7 Support

It’s no secret that people (be they B2C or business buyers) expect a fast response to their questions and support requests. One of the best ways to offer that is through round-the-clock customer support. While it’s expensive, it’s also worth it. Yet, if you can’t provide 24/7 support, make sure your team can respond as fast as possible to customer requests .

And needless to say, if you are able to offer 24/7 support, you should still instruct your team to respond to customer tickets as fast as they can. Don’t forget – customers will be especially expecting that in this case.

Overall, you should make sure you have a well trained, responsive, and dedicated support team for the most traffic-heavy channels.

Monitor Social Media

When customers reach out on social media, be it to ask for support or leave a complaint, they’re doing it first and foremost because they expect a fast response.

As it stands, approximately 84% of consumers expect a response within 24 hours if they post complaints on social media. On Twitter, things are even more tense, as 72% of people expect a response within the hour.

If they do not get a timely response, users will most likely share their dissatisfaction with your brand to friends on social media. Platforms like Facebook make it even easier for them to monitor your average response time.

According to journalist and author Emily Yellin , i n the past when a call to a company went bad, customers would tell their family and maybe their co-workers, but nobody else. Now everybody can see those conversations – making the stakes rather high.

Bearing in mind the risks, your team must have at least one employee focused on tracking and replying to social media comments. Prioritizing those complaints would be a good start.

Offer Live Chat Support

Around 80% of business buyers want companies to respond and interact with them in real-time . The best way to offer them that is through live chat – client-company communications that take place in real time on the company’s website or app.

The statistics don’t lie – live chat is extremely useful for businesses. About 79% of customers say they prefer using live chat because it offers immediate responses. Also, website visitors who use live chat on your website are worth 4.5 times more than the ones who don’t, so there’s plenty of room to increase conversions with them.

What’s more, live chat allows working remotely which makes it easier for your team to provide 24/7 support.

Maintain a Knowledge Base

A Knowledge Base is an important part of your support infrastructure where you must offer access to self-service articles, tutorials, video guides, and other supporting documentation . While putting one together will take some time, effort, and money, it will all be worth it.

According to research , around 91% of consumers would rather use a Knowledge Base if it is available, and 70% of them prefer to use a company’s website to solve their problems instead of using email or phone support.

Furthermore, a knowledge base will take some pressure off your support team . For instance, a customer can be automatically redirected to a relevant knowledge base article or tutorial when they submit a request (or even before they do it), using automated bots. This might keep said customer happy by offering them a quick solution or answer, while allowing your support team to work on other, potentially more urgent support tickets.

Chatbots become more popular these days as they allow businesses to support clients 24/7 without using an additional human workforce. Configured properly, they will help customers get solutions quicker than traditional methods of customer support. While the majority still prefers human interaction, 40% say they don’t care whether they talk to a tool or a real person as long as their problem is solved. Many companies use chatbots successfully not only on their websites, but on Facebook as well.

4. Build Relationships

Fostering good customer relationships is critical to the ongoing success of your business, weak relationships accounting for 16% of the average customer churn.

Throughout the customer journey and during all your interactions with a client, it’s important to nurture a healthy bond. The key is to make them feel listened and appreciated, knowing they’re dealing with a proactive and professional team.

Dale Carnegie said: “You can make more friends in two months by becoming interested in other people than you can in two years by trying to get other people interested in you.” While he was talking about winning friends, the same principle applies to the business world. 

Get to know your audience and tap into their feelings and expectations. Surveying your customers would provide you with a handful of insights in this respect, helping you to better deliver on your promises. Be proactive and monitor customer health by connecting with your audience on a regular basis and not only when you have something to sell. Keeping a pulse on customer satisfaction will also allow you to take immediate action in case of a sudden decrease.

Pay proper attention to building relationships with the top segments of your customer base, key contacts, and executive staff. Conduct quarterly business reviews to make sure you are on the same page and ask for feedback on existing processes and on what’s coming next. Make them feel granted with the individual attention they deserve.

5. Listen to Your Customers – Collect Actionable Feedback

Happy customers are loyal customers. Growing your business without learning what your customers think of you is extremely challenging. Growing with detailed, actionable feedback, on the other hand, is a far easier process.

Understanding your customers lets you prioritize the aspects of your business that fuel customer satisfaction and revenue growth, all while scaling down ineffective tactics. It also gives real data on how likely your existing clients are to recommend your product or service to their friends.

You should definitely collect and store all the feedback you receive in one place and share it across departments. Also, have a team that’s responsible for monitoring customer sentiment online (on social media, communication channels, review websites, etc.).

Send out customer satisfaction surveys – NPS and CSAT . We recommend NPS over CSAT, a one-question survey that inquires on the likelihood of recommendation to friends or colleagues on a 0-10 scale. Based on the received feedback, the respondents are segmented into three categories: Promoters are your 9 and 10s, Passives go for 7 and 8 and Detractors range between 0 to 6. You can calculate your NPS score by subtracting the percentage of Detractors from the percentage of Promoters.

NPS makes it easy to assess customer happiness and allows you to send follow-up questions to find out what exactly clients love or hate about your business, and what improvements they’d like to see.

A high NPS score helps you increase your CLV since happy customers are far more likely to stay with your business than unhappy ones. Focusing on increasing your NPS is a great way to keep your churn rate low while expanding your client base.

When it comes to efficiently collecting customer feedback, using specialized NPS software is a solution worth considering. These tools are adopted by many businesses to easier prevent churn, increase expansion, and manage more customers with less effort.

Specialized NPS software is an excellent means to save time and get a clear view of your clients, since it integrates with various services you already use, like CRM and help desk software. What’s more, it collects and gives access to useful customer data and advanced reporting in one place.

All in all, NPS software is a great way to take some pressure off your customer success and support teams, allowing them to better focus on improving the customer experience . Simply put, they’ll be able to reduce churn levels, add ongoing value to the customer lifecycle, improve onboarding and long-term customer relationship, increase renewal rates, and as a result drive more profit.

6. Detect Common Pain Points & Provide Solutions

The idea is to look into your customers’ feedback, and identify the most frequent recurring issues that are being reported.

NPS surveys make this task really simple, allowing you to collect actionable feedback and detect common pain points for both Detractors, customers who are not happy with your brand, and Passives, customers who like your brand, but not enough to become a Promoter.

Once the most relevant complaints are spotted, these have to be prioritized depending on the frequency of occurrence. Another approach would be to prioritize the issues that overlap with both Passives and Detractors.

In case the feedback is too vague to be paired, try to group it into categories, as for example “speed up support replies” or “streamline onboarding process”.

Once the issues are identified and prioritized, the appropriate departments need to be informed and granted full access to the needed data, in an accessible format. Needless to say, the sense of urgency in fixing these problems is a must.

7. Offer Your Clients a Personalized Experience

Service, product, and experience personalization are paramount nowadays if you want customers to be happy and spend more on your business in the long run. After all, 81% of consumers say they expect businesses to both understand them and know when the right time and moment to approach them is.

Also, around 77% of consumers have apparently spent more money on or recommended a brand that has offered a personalized service or experience.

B2B buyers definitely want a more personalized experience, and half of the US B2B marketers who tried website personalization said it was effective .

Here are a couple of ways personalization can help you enhance your customer lifetime value in the long run:

• When it comes to B2B buyers, personalization can help you deliver your messages through the right channel at the right time. Those things don’t just make or break a deal – they also determine whether or not a client becomes a repeat buyer.
• By getting to know your customers better, you can significantly improve the onboarding process by making it feel much more “familiar” and welcoming to new customers.
• Personalization can help your product deliver a better customer experience with a more intuitive UI. And it’s no secret that 8 in 10 consumers are willing to pay more money for a better experience . Not to mention that an investment in UX/UI can return a decent ROI .
• You can use personalization to craft highly personalized in-app messages for each customer segment you have, increasing your odds of converting clients with a lower-paid plan to a higher-paid subscription.
• With a better understanding of what your customers want, how they feel, and who they are, it becomes easier to perform cross-selling and upselling.
• Personalization helps you deliver better and more meaningful customer support, which is vital if you want to increase customer value over time. It also makes it easier for clients to feel like they have an actual relationship with your brand, instead of just being a source of profit.

How can you offer revenue-boosting personalization? It’s pretty much a mix of researching relevant customer data in-depth (which is much easier if you follow the advice we offer at #8) and collecting, analyzing, and acting on customer feedback (this is where NPS surveys help a lot).

8. Share your Product Roadmap

A product roadmap is a comprehensively mapped outline of a product offering over a timespan – a statement of intent that matches the steps related to a product’s development. It’s another source of motivation and ownership sharing with team members.  

Almost everything on the product roadmap has an objective that aims to meet the requirements of the team and those of the customers. Hence, the product roadmap is not solely an internal strategy guide and a plan for execution, but also a commitment towards customer goals, making it important to be shared both internally and externally. ​​

Internal roadmaps are focused on features/fixes, release and milestones. They are generally more granular providing more precise details and timelines. 

The work a member of the team does usually makes sense within a framework, hence sharing the product roadmap helps to align your team and their priorities, as well as create enthusiasm for a product strategy. 

Besides allowing the team to be on the same page and act in the same direction, sharing the roadmaps with your customers is a good tactic offering users a better understanding of the product, the features to be included (especially if the respective feature is a deal breaker) and the related timeline. It is crucial to explain the intrinsic value of a product’s features and its value for a customer.

Sales representatives can share the product roadmap with clients as part of closing an agreement or building interest. Customer Success teams – being more focused on providing solutions to existing issues and offering performance enhancement – can share roadmaps to let customers know that it includes a solution for a current hurdle or an integration with a relevant platform. Taking customer feedback into account at all times and incorporating it into your product roadmap will inevitably affect your customer lifetime value, keeping customer interest alert and creating products that are tailored to customer needs.

When sharing product roadmaps to prospects or existing customers, these should be entirely focused on their benefit. It’s advisable to avoid putting exact dates on externally available roadmaps unless there is definite certainty. A product roadmap is a work in progress so giving an estimate instead of specific dates would be best. Better to underpromise but to overdeliver.

9. Encourage Customers to Switch to an Annual Billing Cycle

If you sell a recurring product or service (for example, web hosting or a SaaS), the total amount of time that customers continue paying for it is one of the most important figures for impacting your CLV.

Customers that stick with your product drive predictable revenue, while the ones that pay for it for only a month or two generate very little income, not even covering your customer acquisition cost (CAC).

If your clients stay for an average below 10-12 months, one easy way to improve your customer lifetime value is to encourage them to switch to an annual billing cycle. This helps reduce churn by committing your customers to a year of usage, producing a higher average CLV and more time to prove the value of your product/service.

The prepaid money could be reinvested into your company and product development . Look at it as if a customer is investing in the company’s growth by lending money at zero interest.

Another advantage of switching to the annual billing lifecycle is that it makes it easy to forecast and predict revenue , thus, in the long run, helps you out in the decision-making process.

At times users forget about their subscriptions, so failing to take care of the annual renewal is a possible scenario. To prevent getting a nasty chargeback surprise, reach out to customers via phone, email or survey before the renewal deadline.

Very few of your customers will extend their billing cycle unless you give them an incentive to make the switch , though. One great way to encourage opting for annual payments is to offer a discount (typically in the range of 10-20% off), provide 1-2 months or additional usage for free.

10. Expansion Revenue – Upsell and Cross-Sell

If you sell several complementary products or services, have different pricing tiers, or charge based on product usage, seats, etc. – upselling is one of the easiest ways to raise your CLV. Upselling and cross-selling (which is similar, but not the same) are two simple, effective ways to increase the amount of money your customers spend on your business.

Upselling is the art of selling a more expensive version of a specific product or service . If you deliver a service, upselling could mean increasing the scope of that service. If you offer SaaS software, it could be helping a customer upgrade from a basic plan to a more expensive one. Upselling is particularly useful since, according to data , 70-95% of revenue is generated by it, while only 5-30% comes from the initial sale.

Looking into the data provided by the 2021 Private SaaS Company Survey , there is a tendency for bigger companies to rely more on upselling existing customers.

Cross-selling, on the other hand, is the art of selling a similar, complementary product or service to your customers . A business looking to buy a website domain would likely be interested in web hosting and privacy protection services too, so they’re a natural choice for you to cross-sell and increase the value of the transaction.

Amazon has perfected upselling and cross-selling and uses both practices to drive a huge amount of additional revenue every month. Used properly, upselling and cross-selling can both help you generate an extra 10% or more revenue per month from your existing customers.

Here are some great tips for cross-selling and upselling to your current clients:

Offer bundle products : Group different products and services together and sell them at a lower price than what they would have been sold for separately. It helps you increase the value of customer purchases by offering complementary products in a combo.

Offer temporary upgrades : This works best for SaaS businesses. Try giving users who have a basic subscription a free temporary (7-day or 14-day) upgrade to your premium plan after an update. Some users might be willing to fully make that transition once they get to see what your more expensive subscriptions have to offer first-hand.

Use a sidebar widget with popular choices : You can have a small list of popular products on your sidebar. This allows your customers to see the most popular products when they are browsing your website.

Add complementary products at checkout : Products you offer as cross-sells should address the needs of your customer. Ideally, they should complement the primary product in the shopping cart.

Free shipping with minimum spend : The word “free” by itself excites many buyers, but when you combine it with free shipping with a minimum order size condition, it makes it even more appealing. Customers are more likely to spend more money – that they would have otherwise spent on shipping – to buy something else.

Keep recommendations limited : Don’t overwhelm potential customers with too many choices. Otherwise, you run the risk of customers abandoning the cart. When faced with a choice, it’s easier for customers to decide between three items than ten.

11. Implement a Dunning Management System

A dunning management system is a solution that automatically retries a failed payment or expired credit card and sends a drip of renewal notifications to customers whenever a charge to their credit card is declined. It turns out to be crucial for any subscription business, preventing frustration and annoyance-driven customer churn.

After all, credit card charges can fail for a number of reasons:

• Credit card limits
• Restrictive corporate expense policies
• Expired credit cards
• Stolen credit cards
• Lost credit cards

Freezing a customer’s account too fast in such a situation can negatively impact the experience they have with your company. Of course, if you’re too lenient with declined charges, your business will also have to suffer since you’ll just end up losing money in the long run.

Furthermore, dunning management can lower your churn rate and improve your customer lifetime value by enabling automatic charge retries . This way, accounts are not closed prematurely since you can charge the card again a couple of days before the account should be closed, for example.

What’s more, this solution lets customers know exactly when the service can be renewed again. Many clients would likely appreciate this kind of reminder since it saves them time as they don’t need to look up your FAQ section or contact your support team by email or phone.

Also, a dunning management system ensures you won’t have to deal with so many angry emails or calls from upset customers who forgot they had your service or product set to autopay. Sure, that won’t necessarily do wonders for your CLV rates directly, but it will reduce your brand’s odds of getting negative reviews because of it.

And, of course, the automation offered by dunning management saves your support plenty of time . They don’t need to waste hours on counter-checking and sending out dozens of reminders and follow-ups. Instead, they can focus on other tasks.

Here are some billing management systems with incorporated dunning management functions:

12. Run Loyalty Programs

Ensuring customer retention and as a result a higher customer lifetime value can also be accomplished with the help of loyalty programs which offer incentives for repeat business. This can include offering discounts or rewards, by means of loyalty cards, setting up loyalty apps or points schemes to earn on purchases. These programs can be very successful if they are properly implemented. 

Among the most familiar examples are the airlines that offer miles depending on the ticket fare. Frequent fliers prefer to use the same airline to accumulate miles and get a free ticket. The cosmetics brand Tarte rewards points not only for purchases, but for filled-in surveys and engagement on social media.

You could also try the refer-a-friend strategy: Airbnb program allows guests to get bonuses for every referred friend who books an apartment. But that’s not all: Airbnb encourages guests to spend the acquired bonus as it has an expiration date – prompting them to use the service as well and spend more. 

If loyalty programs do not seem viable to you, reward your customers for every x amount of money spent or create membership programs that offer additional perks for a small price. A good example is Amazon Prime: members of this program get faster delivery – which is what every customer needs – and, additionally, music and video streaming. What’s more, according to CIRP , Amazon Prime members only get better with time, increasing their spending over years. 

You should also know your most fierce Promoters and reward them via specific campaigns that recognize their loyalty. It may include top-of-mind benefits in loyalty programs, a preorder of unreleased products, access to specific services or even a personalized thank-you note. By making them feel special you will be able to cultivate a sustainable customer relationship.

13. Increase Your Pricing

As a business, it’s natural you will want to increase your pricing as you grow due to various reasons. It can be either because you changed your customer profile, added new features to improve your product’s capabilities that need to be monetized or simply because the existing prices have not been revised for years and are not profitable. Companies often tend to underprice their services when they first start out, after all.

Moreover, Andreas Hinterhuber’s study refers to pricing as a largely neglected tool in marketing, a 5% price increase leading to a 22% improvement in profits that, according to the author, is far more than any other methods.

In terms of growth, Patrick Campbell, CEO of Price Intelligently and ProfitWell accounts for a 30-40% increase in revenue for companies that have never really attacked their pricing, and at least an 11-15% boost for companies that are more forward-thinking.

But what do you do about your existing customers? Let’s face it – you can’t expect your customer retention levels to be too high if they are taken by surprise with unexpected billing changes. It’s even safe to assume some of them might get so upset that they might even leave your brand altogether.

To showcase – in 2010, the management of Zendesk, the help desk software, outraged customers when raising their prices, resulting in a 300% increase in monthly fees for some users. Again, it’s natural for businesses to hike fees at some point, but checking how dramatically it would affect the bills, especially of their early customers, might have helped avoid the wrong turns.

That’s where grandfather billing plans come into play. Simply put, you keep the original pricing for your existing customers, and implement the new pricing plans you want for new customers.

Another approach would be to give customers a choice and make them feel in control. Provide a set of options for existing customers so they have the opportunity to decide what suits them better. Let’s say, they could have their current plan at a higher but discounted rate, or downgrade it to keep the same price.

This way, you get to make more profit while also giving existing customers enough time to get to love your brand to the point where they themselves will be willing to start paying more for your services.

14. Instill a Customer-Centric Approach

Keeping your customers at the heart of everything is an important change that you need to make when developing and maintaining relationships with potential or existing clients. Companies which place the customer at the heart of their organization experience increased customer lifetime values as well as decreased turnover. 

Building a customer-centric organization requires commitment. It is imperative to commit to the values of customers first and instill a customer-focused thinking into your entire company. It’s not a simple buzzword any longer but rather a key principle for business today that can directly and effectively affect your bottom lines.

Companies need to be obsessed with creating positive experiences for people to improve their perception of a brand. The entire organization must be oriented towards its customer from back office to front line in order to deliver value. Companies need to build a customer-centered culture, rather than approach it as a one-off transaction. 

The Bottom Line

If you value customers, your revenue will grow. It’s as simple as that. It’s a matter of showing them how much they mean to your business (by asking them for feedback and acting on it), by offering them exactly what they need (even if they’re not aware they need it yet) and the utmost convenience, providing top-notch support, and an amazingly personalized customer experience.

In case you’re looking for a way to boost customer lifetime value using NPS, Retently can help you retain more customers and grow your business. With a simple one-question survey, you can learn exactly what your existing users and customers think, giving you the actionable data you need to fuel long-term growth. Start a free trial today !

Mastering the 5 Point Likert Scale for Effective Surveys

CSAT: Definition, Calculation & 2024 Benchmarks

What is a Good Net Promoter Score? (2024 NPS Benchmark)

SurveyMonkey Competitors: A Comprehensive Review of the Top Choices

Best Practices for Conducting an In-App NPS Survey

Retail Customer Experience: Strategies for Keeping Shoppers Engaged and Loyal

AUDIENCE SURVEY

Understand your options for business exit and plan ahead, identify buyers, improve the company and maximize your return.

Investing a lifetime in building a business, then facing the possibility of selling it and retiring, can be a difficult and emotional time for a business owner.

It’s even more challenging if the exit plan resides entirely in the owner’s head and no steps have been taken.

It’s a mistake to wait until the business exit is upon you to think about how you want to leave, who should succeed you as owner and what the value of the business may be.

KIM ZAGAR, CPA Principal & Director of Private  Business Advisory [email protected] 440-290-3906

Kim leads HW&Co.’s Private Business Advisory department, serving clients of various sizes and stages with business, tax and accounting matters.

Preparing for business exit and structuring the company to ensure it brings maximum value typically takes three to five years, with some planning starting long before that. Selling a company quickly with no plan or preparation can often bring a lower price, and no owner wants to leave money on the table after a lifetime of work.

If business exit is on the horizon within the next five years, the following key considerations should be on your agenda for discussions with trusted advisors.

Understand your options

What are your personal goals for selling the business? Funding retirement, continuing a legacy and securing the company workforce are all important factors that can drive decisions.

• Who are the likely buyers? Are there family members who want to take over the business, and if so, do they have the funds to buy it? If no family members are interested, perhaps you have key managers who have given many years to the business and are capable of running it. You may be able to structure a multi-year buyout deal for a management group, or you could consider an Employee Stock Ownership Plan (ESOP), which would give all your workers ownership interest. If there are no potential family buyers or internal buyers, consider the types of buyers on the open market who would be most interested in your company.

• What is your business worth? Obtain an independent business valuation. Besides giving you a range of market value for your company, a valuation can help identify critical areas affecting the value and need attention to boost the potential sale price.

• Understand your company’s cash flow and its role in valuation. Also, understand the tax consequences of a deal structure. Will your transaction be a stock sale or an asset sale? A structure that benefits you may not be attractive to a potential buyer, so talk to advisors about different transaction scenarios.

•  Clean up your books, make sure the balance sheet and cash flow are strong and ensure your obligations are current.

•  Is your company structured as an S corporation? Selling it as a limited liability company (LLC) has potential tax benefits, and a restructuring can be accomplished in a few months if warranted.

•  Talk to advisors to understand the tax and legal ramifications of selling your business. Many owners find that once they’ve sold the business, paid the taxes and paid off their debts, there is less money left than anticipated. Planning ahead can help set realistic expectations.

Create a plan that can be executed over the next three to five years as you prepare for exit. It should identify likely buyers, plans for improving the company to help maximize value, ideas about deal structure and tax ramifications and a timeline.

Too many business owners don’t know their exit options, and they rob themselves of the opportunity to plan for them effectively and maximize the return on their years of hard work.

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• Latest Issue

• What is the time value of money? 

The mathematics of TVM

Applications of tvm, how to calculate tvm.

• TVM in personal finance 
• Challenges and considerations 

Understanding the Time Value of Money

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• The time value of money (TVM) is the concept that a dollar today is worth more than a dollar tomorrow.
• Understanding TVM allows you to evaluate financial opportunities and risks.
• The principle underlies almost every financial and investing decision you make.

The time value of money (TVM) is the concept that the money you have in your pocket today is worth more than the same amount would be if you received it in the future because of the profit it can earn during the interim. For example, let's say you can either receive a $100,000 payout today or $10,000 per year for the next ten years totalling $100,000. Ignoring taxes, the $100,000 payout today is worth more, according to the TVM principle, because you can put your money to work. For example, you can invest in stocks, buy real estate, or put it in a certificate of deposit (CD) .

Understanding the time value of money can help you in making decisions ranging from which job has better salary terms, what's a good rate for a loan, or whether the investment you're considering has good growth potential.

What is the time value of money?  

Definition and basic principles .

The time value of money is an important concept to keep in mind because your money, once invested, can grow over time. Even if you were to just put it into a CD or savings account, the money can earn compound interest , and the impact of compounding on investment growth can be significant. 

On the flip side, money that is not invested will lose value over time. Just think about what you could buy for $1 when you were a child compared to what that same $1 would get you today. This is because inflation and loss of potential earnings erode the value of your dollars. If you keep your money under your mattress for 10 years, not only will it be worth less because of inflation, but you'll also miss out on the interest it can earn when invested. 

"So many young people are so busy juggling life, they are missing out on the compounding returns of investing smaller amounts of money," says Jeff Rose, founder of GoodFinancialCents.com . "Say, for example, a 25-year-old were to invest $50 per month today. They would have to invest 3-4 times that to make up the difference if they procrastinated until they were 35."

TMV is a fundamental concept that provides the foundation for virtually every financial and investing decision. From taking out a loan to negotiating a salary or making a purchase decision, use the time value of money to evaluate the best financial course of action.

To calculate TVM, you need a handful of variables. 

Present value (PV) 

Present value (PV) is the value that a future sum of money (or combination of income streams) has right now. For example, the present value of $1,050 that you will earn one year from today with an interest rate of 5% is $1,000. 

Future value (FV) 

Future value (FV) is the value that a current sum of money (or asset) will have at a predetermined future date based on an expected return (or rate of growth). For example, the future value of $1,000 one year from today based on a 5% annual growth rate is $1,050. 

Discount rate 

The discount rate is the rate of return used to determine the present value of an asset or investment. Another way of putting this is that the discount rate is the return an investor would miss out on by accepting an amount in the future as opposed to accepting it immediately. 

Compounding frequency

The compounding frequency, or how often interest is assessed, can have a significant impact on future value. If an investor puts their money into an interest-bearing asset, this interest can be assessed on a monthly or quarterly basis, for example. 

Investment analysis 

The TVM can be harnessed when evaluating different investments. For example, interested parties can use TVM when valuing bonds , as these securities have a par value, meaning a price that issuers have promised to pay the buyer at a specific point in time. Further, many bonds make regular (coupon) payments to their owners. Armed with this information, interested parties can calculate a bond's present value. 

Loan amortization 

The TVM plays a key role in amortization, which is basically the process of lowering the book value of a loan over time. Lenders need to calculate payment schedules when extending credit to borrowers. A dollar lent to a borrower today is worth more than a dollar paid back either tomorrow, next month or a year from now. 

Retirement planning 

When planning for retirement, investors can benefit from compound interest, which refers to interest that is charged on top of interest that has already built up. For example, if an investor puts $100 into an asset that pays 5% in interest every year, it will be worth $105 at the end of the first year. However, at the end of the second year, it will be worth $105 (1.05) or $110.25. 

Formulas and examples 

Practical examples of TVM calculations can help provide clarity for interested parties. We'll use one here. Let's say someone would like to buy your car and they can offer you $15,000 for it today or $15,500 if they can pay you two years from now. TVM teaches us that $15,000 today is worth more than $15,500 in two years. 

Here's the basic formula used for this example:

• PV is the present value of money.
• i is the interest rate or other return that could be earned.
• t is the number of years to take into consideration.
• n is the number of compounding periods of interest per year.

This will help you determine how much money you will have if you took the $15,000 and invested it today or if you waited two years for the $15,500. 

TVM in personal finance  

Budgeting and saving .

When budgeting , individuals should keep in mind that every dollar they avoid spending can be saved, which can in turn be invested in something that will generate a positive return over time. Any dollar saved and invested today will be worth more than the same dollar saved and invested tomorrow. 

Debt management 

When managing debt , individuals should keep in mind that any dollar eliminated from their debt today will be less costly than the same dollar eliminated from their debt tomorrow (or further down the line). As a result, many individuals can benefit from focusing on frugality, keeping their expenses down and using whatever excess funds they have to reduce their existing debt load. 

Planning for future expenses 

Individuals can use the TVM to their advantage when planning for future expenses. More specifically, they can invest now in assets that will rise in value over time so that they can make these purchases. 

Challenges and considerations  

Inflation and its impact on tvm .

Inflation has a negative impact on the TVM, because it causes the purchasing power of money to decrease over time. In other words, a dollar will be worth less in the future than it is today. 

Interested parties can overcome the inevitable deterioration of their purchasing power by investing in assets that generate positive returns. 

Estimating future costs and returns

 Nobody knows for certain what will happen in the future. For example, you have no idea how much the car you want to buy now will cost five years from now. It is impossible to know how much the components, for example steel, will rise in value. 

When it comes to investment, risk is an inherent factor. You never know for certain what returns a specific investment will provide. While a bond may have a par value, the issuer of that bond could potentially default and never pay you back the amount you invested in the first place. 

The time value of money is an important concept to understand for personal finance. It can help you decide how much to budget, evaluate a job offer, figure out if a loan is a good deal and help you save for the future. TVM showcases why your money loses value over time because of inflation. 

Apply the TVM formula to any loans you have to determine if it's better to pay them off or invest. You can also use it to see how increasing your retirement contributions can affect the future value of your dollars. It's a great tool that gives you information that can help you make smarter financial decisions.

The time value of money is crucial because it allows individuals and businesses to evaluate how much money will be worth in future terms, which can in turn enable them to make better-informed saving, investment and borrowing decisions. 

Inflation has a negative impact on the time value of money, because it decreases the purchasing power of money over time. A dollar will purchase more today than it will in the future. 

Being aware of the time value of money can certainly motivate an individual to build up personal savings, as money saved today will be worth more than money saved tomorrow. 

Simple interest is assessed on the principal, for example the amount saved, whereas compound interest is assessed on the original principal and all interest payments that have been made thus far. 

You can pick the right discount rate by harnessing the risk-free rate, expected inflation and the risk premium for the investment in question. As a general rule of thumb, the higher the perceived risk, the greater the discount rate needs to be to compensate for that risk. 

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