Customer lifetime value (CLV or CLTV) is an important metric that offers key insights into your customer touchpoint effectiveness, future cash flow and overall business model.
In this article, we cover methods for calculating CLV, its benefits and and key factors to consider when analyzing or applying it.. We also provide a simple formula for determining customer lifetime value.
What is customer lifetime value (CLV)?
Customer lifetime value, also known as lifetime value, or LTV, is an individual customer’s value to the company throughout their “average customer lifespan”.
CLV is a key part of sales and marketing efforts to validate whether a customer relationship is profitable. Companies can use this metric to calculate how much of their budget to allocate for customer acquisition and retention without incurring losses.
There are two types of CLV: historic CLV and predictive CLV.
Historic customer lifetime value
Historic CLV uses historical data to calculate the amount of money someone has spent with your brand and their average purchase value.
For instance, imagine you run a B2B SaaS business. If someone has renewed their license for $100 on April 1 for the last five years, your historic CLV for that customer would be $500 and the average purchase value would be $100.
Predictive customer lifetime value
Predictive CLV looks ahead rather than back to predict how long someone’s relationship with your brand might be and how much they’re likely to spend over the entire relationship.
Returning to our B2B SaaS example, if your customer has spent $100 on April 1 over the last five years, you can predict they’ll probably spend another $100 on April 1 the following year.
Customer lifetime value benefits
Calculating a customer’s lifetime value can help refine your sales and marketing processes to attract the most promising customer segments. Understanding this metric gives you advantages that help you improve your churn rate and boost your bottom line.
Here are some of the benefits of calculating CLV:
Budget planning. Knowing your current CLV helps you plan next year’s budget and decide where to focus your marketing efforts.
Focusing on profitable and loyal customers. If you know which types of customers are more profitable and loyal, you can channel more marketing efforts and budget into attracting similar customers. The data can validate your ideal customer profile (ICP) or suggest that you pivot to a different target audience.
Forecasting customer base profitability. Details on your customer base’s profitability help you make more informed decisions about your current sales and marketing strategies and whether they’re working.
Upselling and cross-selling. It’s considerably easier to sell to existing customers than to new ones. According to a study by McKinsey, cross-selling can increase profits by 30% and sales by 20%.
Calculating CLV provides a deep understanding of the most profitable customers, simplifying decisions for sustainable and long-term customer loyalty.
What to include in your CLV calculation
Calculating the lifetime value of a customer can vary from one company to another due to factors like industry, location and business goals.
For instance, e-commerce businesses might generate irregular revenues through repeat purchases, while SaaS companies expect monthly recurring revenues.
However, there are some factors that every business should consider when calculating CLV, including:
Average purchase frequency
Customer acquisition cost (CAC)
Average order value
Business overheads
Total revenue generated by a customer
Subscriptions and contracts
Costs for marketing strategy, sales and customer relationship management
Discount actions
You should also include any other data relevant to your business, like recurring revenue.
Example: how to calculate CLV
CLV formulas can range from simple to complex, depending on your objective.
Typically, you need additional metrics for the calculation, which you must determine in several intermediate steps. Here’s a simple example of how to calculate LTV in a subscription model:
A SaaS company offers its software in different subscription packages. When creating this example lifetime-value-of-customer equation, it needs the following values:
Average contribution margin: $200
Repurchase rate: 12 per year (monthly subscription)
Acquisition costs: $150
Number of customers at the endpoint (CE): 350
New customers (CN): 125
Number of existing customers at the start point (CS): 260
Time: 1 year
For the final formula, the company must also calculate the customer retention rate and customer lifetime as follows:
Customer retention rate = ((350−125) / 260) = 0.86 (86%)
To determine the customer lifetime, the company must divide 1 by the churn rate (the percentage of customers lost in a year):
Customer lifetime = 1 / (1−0.86) = 7.1 years
Now, it can insert these metrics into the formula for Customer Lifetime Value to get the following value:
CLV = ($200 x 12) x 7.1−$150 = $16,890
Customer lifetime value formulas
From the example above, the following formula for calculating CLV emerges:
Customer lifetime value = (contribution margin x repurchase rate) x customer lifetime − customer acquisition costs
If the numbers and values are overwhelming, you can always use artificial intelligence (AI) to help you calculate a customer’s lifetime value.
Note: Although understanding CLTV’s meaning is significant for marketing and sales, modern customer relationship management (CRM) systems offer automated reports that also forecast future and past revenues. In Pipedrive, for instance, you can create custom sales reports on expected and recurring revenues, allowing for efficient financial resource planning.
Designing company goals based on your CLV
Once you’ve calculated your CLV, consider what you’ll do with it. How will it influence your business going forward? What steps will you take to improve your CLV?
Here are some steps to help you get the most from your CLV:
1. Define your goals | What do you want to achieve with your CLV analysis? Are you looking to identify the general customer value or calculate the profit margins of specific acquisition channels or products? |
2. Review data and calculations | Check the available customer data. Gather all relevant data to determine which calculation makes sense for your company. |
3. Measure and optimize | After calculating the CLV, use this KPI for decision-making and customer experience enhancement. |
If you find, for example, that social media delivers a higher CLV than direct marketing, you can use this data to optimize your marketing expenditures and actions.
Review and recalculate your CLV regularly to keep your strategies effective, as costs or industry trends can change.
How to increase customer lifetime value
To increase customer lifetime value (CLV), focus on enhancing customer satisfaction and loyalty through personalized experiences and high-quality customer service.
Here are some ways to improve your CLV and reduce customer churn:
Targeted marketing campaigns
Targeted marketing campaigns that resonate with your customer base’s core needs and preferences help you continue to tap into your target audience.
For example, you could use remarketing campaigns to reach out to existing users who visited a landing page for a new product and offer them a loyalty discount.
Start planning your email marketing campaign now
Customer feedback
Prioritize customer feedback and continuously improve your product and service offerings based on this feedback. Regular review ensures you’re solving your customers’ pain points, and they still think you’re the right business to help them solve those issues.
For example, you could send a feedback survey to long-term customers to find out why they’ve been so loyal, then double down on what’s working and find alternatives to what isn’t.
Cross-sell/upsell
Using in-depth customer behavior analysis, strategic cross-selling and upselling can generate more immediate revenue while strengthening long-term customer relationships.
For example, the email below from Zoom upsells the recipient to a Pro Annual plan with a 30% discount.
The short email creates a connection by discussing something that was happening at the time of the campaign. This reference shows that Zoom understands the customer’s situation and how a Pro Annual Plan could benefit the recipient.
Loyalty program
A customer loyalty program can help you reward your best customers while enticing them to return for more.
For example, coffee chain Costa’s loyalty program, Costa Club, rewards users with “beans” each time they purchase. For every 10 beans a customer collects, they get a free drink. They also regularly receive discounts, like 20% off food or drink, via the rewards app.
This technique will make customers want to visit more to get their free coffee and use the offered discounts.
Customer community
Making your customers feel like they’re part of a community strengthens your brand, increases customer support for your brand and can attract more customers in your target demographics.
For example, you could organize regular events for your most valuable customers, nurturing customer relationships and conversations via social media or email marketing.
User-generated content
User-generated content (UGC) is a powerful way to get more customers into your orbit, particularly on social media.
For example, you could create a branded hashtag where current customers post about their visit to your store or an experience they had with you online to show they’re part of your community.
UGC can attract more people from your customer segments, particularly if an influencer posts about a promotion in real time.
UGC can be particularly effective for design tools in the B2B space. For example, productivity app Notion uses its template gallery to promote users’ designs for various purposes, including content planning, career building and project planning.
Promoting users’ designs also expands the ways people use the product, increasing the likelihood that they’ll be long-time customers.
Final thoughts
Calculating your CLV helps you separate valuable from unprofitable customers, prevent poor investments and lay the foundation for a sustainable customer journey.
While it’s important to understand the formula for calculating CLV, you can implement it using insight reporting tools and a modern CRM system.
This approach simplifies customer value assessment and aligns marketing and sales strategies more closely with company growth goals, ensuring a robust framework for long-term success.
A good CRM can help you gather and analyze the metrics that determine your customers’ lifetime value. Get started today with Pipedrive’s free 14-day trial.
