Customer Lifetime Value is a key performance indicator all companies should calculate to keep track of their health. You could use multiple CLV formulas to find yours, but which one is the most reliable? You’re about to discover how to measure customer lifetime value so you can have an accurate representation of how profitable your customers are.
What is Customer Lifetime Value?
Customer Lifetime Value (CLV) represents the predicted net profit that a customer generates throughout their relationship with a company. Instead of looking solely at the value brought by a customer at their first purchase, CLV helps you calculate how valuable that customer could be for an unlimited period.
In marketing resources, you will find “Customer Lifetime Value” under different initialisms, such as “CLV,” “LTV,” or “CLTV.” Marketers also refer to the same concept when they say “customer equity.”
Customer Lifetime Value indicates how healthy your business is. Companies measuring and analyzing CLV realize that their customer-centric strategies should be inspired by their best customers, not their average customers.
“In the world of customer centricity, there are good customers… and there is everybody else.” – Peter Fader
In other words, if you want to generate better profits in the long term, you must focus on the right customers. You need to track CLV to see how good you are at attracting and keeping those profitable customers.
Why is Customer Lifetime Value Important?
Customer Lifetime Value is one of the most important metrics because it shows you how healthy your business is and keeps all your departments focused on bringing the most value and generating the most profitable customers.
Measuring Customer Lifetime Value helps you answer some of the essential questions for your business:
Do the efforts of your departments work?
Calculating customer lifetime value and constantly keeping track of it allows you to measure the financial impact of your marketing, merchandise, and sales efforts. Customer value optimization is the responsibility of all departments.
Thus, CLV becomes a company-wide measure of your store’s success and helps you use all resources wisely.
Is your store’s growth sustainable?
Acquiring new customers that never come back after the first purchase is not a sustainable plan for any company. The more repeat customers you have, the higher the chances to increase CLV and keep a steady cash flow.
Plus, keeping an eye on the CLV to CAC ratio helps you adjust the budget for acquisition campaigns and optimize your efforts to acquire more customers like your most loyal ones.
> Before wishing for repeat purchases in first-time buyers, learn how to encourage the second purchase.
Do you know which are your best-performing products?
Product assortment has a significant impact on how low or high your customer lifetime value is. If you want to improve your customer lifetime value, look for sticky products, add new ones to your offer, and eliminate the toxic products that generate churn.
Keep in mind that both CLV and product optimization result from interdepartmental efforts – marketing, merchandising, and customer experience.
> Discover the product optimization framework that helps you improve product assortment and become more customer-centric.
Do you know what the impact on the bottom line is?
Not all customers are profitable from the first purchase, but that doesn’t mean they can’t become top customers in the long term. Tracking CLV helps you optimize the entire customer journey, from customer acquisition campaigns to onboarding, prevention, and reactivation campaigns.
Comparing customer lifetime value with the costs of acquiring and retaining customers helps balance your efforts to positively impact the bottom line.
Do you know what generates long-term loyalty?
Knowing the CLV across all customer segments helps you identify who your most valuable customers are. Next, you can dig deeper, looking at what generates customer loyalty and identifying opportunities.
As a result, you can refine your loyalty program, offer your best customers the VIP treatment and make your business stronger regardless of competitors’ aggressive campaigns.
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How to Measure Customer Lifetime Value
You can calculate Customer Lifetime Value in multiple ways.
The easiest way to calculate CLV is by using the following formula:
CLV = customer revenue – the cost of acquiring and serving that customer
As simple as it is, it’s not a reliable one because businesses are more complex than that and other metrics influence CLV.
For a more accurate business overview, companies calculate the historical and predictive customer lifetime value.
Historical CLV is calculated based on historical data, so you need access to the total purchases and the total gross profit at the individual level (per customer).
The historical customer lifetime value formula is:
Historical CLV = (Transaction 1 + Transaction 2 + … + Last transaction) * Average gross margin
Predictive CLV is calculated based on historical transactional data and behavioral indicators that help you forecast the evolution of a customer’s relationship with your store.
To find the predictive customer lifetime value, you can use the simple or detailed formula.
The formula for the simple predictive CLV is:
In this formula, the average customer lifespan is measured in months. The simple predictive CLV is used to calculate the detailed predictive CLV, so we note the former as “CLVs.”
The formula for the detailed predictive CLV is:
CLV = CLVs * Monthly retention rate1 + Monthly discount rate – Monthly retention rate
You’re already collecting plenty of transactional data for each customer, so calculating CLV shouldn’t be that hard.
Do you want to see CLV in action?
Download the CLV formula Calculator – a tool that takes into consideration all the metrics that influence CLV and metrics that you should monitor.
Although manually measuring customer lifetime value is better than no measurement at all, manual work is tiring, and you’re prone to errors.
Switching to a solution that helps you calculate CLV automatically means you constantly have updated values, and you can analyze CLV among different segments and during various periods.
> See the difference between manual and automated CLV calculations in the Reveal vs. Excel example vs. Analytics comparison.
Customer Lifetime Value Example
Customer Lifetime Value varies from a business to another, from an industry to another.
We understand the need to compare your results with your competitors’. That’s why we created a free Real-time Customer Lifetime Value (CLV) Benchmark Report that gives you 24/7 access to some of the most important performance indicators in eCommerce, including CLV benchmarks.
In the graph below, you can see the benchmark for CLV in Q4 of 2021. According to our data aggregated from 1500+ stores, the industry with the highest CLV is “Home and Garden,” followed by stores in the “Apparel clothing accessories” and “Apparel” category.
Now, let’s take a look at the historical CLV of a fashion retailer. The CLV at the company level increased from USD 145 to USD 165 in a year. The overall evolution of CLV is good, but you want to go more granular and look at the CLV at the segment level.
Historical CLV report in REVEAL
Below, you can see the CLV for the most valuable RFM segments over the same period. The CLV for Soulmate segment, which includes the most valuable customers of the fashion retailer, had two lows in January and July 2021. To avoid these trends, the company should perform a qualitative analysis, identify why the CLV dropped during these two months, and use the insights to improve future initiatives for this valuable customer segment.
Historical CLV by RFM Group report in REVEAL
Tips to Increase Customer Lifetime Value
Although retaining customers is cheaper than acquiring new ones, it’s not necessarily easier. It takes time to win your customer’s trust. Details that seem insignificant can put an end to a lasting relationship.
Here are some tips to help you increase CLV and keep your business healthy:
Attract better new customers
Knowing your ideal customer helps you create better customer acquisition campaigns. Get away from the trap of assumptions and define your ideal customer profile based on updated customer data. One way to avoid misleading customer profiles is using RFM segmentation to identify the best customer segments.
We call the best customers “Soulmates,” and analyzing what they like and what makes them loyal helps you design better campaigns for attracting new customers like the best ones you already have.
> See more about how to improve the acquisition and retention strategies based on the ICP.
Improve the customer retention rate
When you calculate CLV, you need the customer lifespan (CL), which you calculate based on your Customer Retention Rate (CRR). Improving CLV is highly dependent on your ability to retain customers in the long term, so you always need to keep an eye on CRR and your retention curve.
The retention curve shows you how many orders you need to win your customers’ trust and after how many orders they become engaged. If a segment of high potential customers doesn’t come back for multiple orders, you still have to figure out how you can generate a habit in this segment.
The Retention Curve, as seen in REVEAL
Use NPS before and after delivery
When aiming for a higher CLV, you must stay aware of customer feedback – how customers feel about your products and their interaction with your brand. Measuring the Net Promoter Score pre and post-delivery and analyzing the scores helps you predict future customer behavior.
If you want to build long-lasting relationships, you must keep track of customer sentiment and act in real-time to resolve complaints and prevent churn.
> Learn all you need to know about the difference between pre-delivery NPS and post-delivery NPS.
Improve customer support response
Along with monitoring NPS, you also need metrics that help you evaluate the customer support team, such as Time to First Response and Time to Resolution. All these metrics help you know if there are any customer experience issues that you must fix and stay in the way of CLV improvement.
Let customers know you care about them and put in place a system that allows you to answer right away. You can’t aspect customer loyalty if you can’t keep them satisfied at every interaction.
> Steal this post-purchase email flow and discover how to use NPS surveys to build a better customer journey for your customers.
Pay attention to the Purchase Frequency and the Average Days Between Transactions
The purchase frequency varies across industries, and it’s highly dependent on the habit formed around your offer, the onboarding process, and the experiences you create for your customers. Analyze your best customers’ behavior and purchase frequency and see how you can replicate that behavior among other high potential segments.
The Purchase Frequency by Industry – captured from the Real-time Customer Lifetime Value (CLV) Benchmark Report
Average days between transactions (ADBT) is another important metric that allows you to fine-tune your campaigns to encourage habit forming, increase purchase frequency, and avoid churn. Monitoring ADBT helps you anticipate the next moment of purchase and send the right message at the right time.
The Average days between transactions (ADBT) – captured from the Real-time Customer Lifetime Value (CLV) Benchmark Report
Once you learn how to measure customer lifetime value and start tracking and analyzing it regularly, you’ll be more aware of how well your efforts work. Based on your CLV, you can begin in-depth qualitative research and identify how to replicate tactics that boost CLV and eliminate the friction that negatively influences CLV.
If you’re looking for a strategic approach to CLV, you should start the Customer Value Optimization course and learn from 9 world-class experts in eCommerce how to make your store thrive.
Frequently asked questions
Customer Lifetime Value is a prediction of the net profit a customer can bring to your business during their relationship with your brand. For example, a woman ordered for her family the same amount of water every month for the last two years. Each month she paid $95 to the company that delivers bottled water. If the cost of acquisition was $45, then the CLV is $2,235.
The Customer Lifetime Value (CLV) ratio or the CLV to Customer Acquisition Costs (CAC) ratio is calculated by dividing CLV by the CAC. If you’re using the net margin to calculate CLV, your CLV should be three times greater than the acquisition cost.
The simplest and most common Customer Lifetime Value formula is the customer revenue minus the cost of acquiring and serving the customer. For more accuracy, businesses use the historical and predictive CLV formulas: Historical CLV = (Transaction 1 + Transaction 2 + … + Last transaction) * Average gross margin; Predictive CLV = CLVs * Monthly retention rate1 + Monthly discount rate – Monthly retention rate.
To calculate the LTV or Customer Lifetime Value, you need access to the transactional data of that customer, including the customer revenue and the cost associated with acquiring and serving that customer. The simple CLV formula is customer revenue minus the cost of acquiring and serving that customer.