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How much is a customer really worth to your business? The answer goes far beyond their last purchase. Customer lifetime value captures the total revenue a customer generates throughout their entire relationship with you. And tracking it can transform the way you approach growth, retention, and profitability.
Key Points
• Customer lifetime value (CLV) represents the total revenue or net profit a business can expect from a customer over the entire duration of their relationship.
• Loyal customers who purchase consistently and frequently over time generally achieve higher CLV than one-time buyers, making customer retention a core business growth strategy.
• Product and service quality, along with exceptional customer support at every stage of the relationship, rank among the most significant drivers of increased customer lifetime value.
• Product adoption can be a major CLV driver as existing customers who expand usage and adopt more offerings tend to generate greater lifetime revenue.
• Roughly three times the customer acquisition cost (CAC) equals a strong CLV benchmark.
What Is Customer Lifetime Value?
The definition of customer lifetime value (often referred to as CLV or LTV) is the total revenue (for gross CLV) or net profit (for net CLV) you can expect from a customer over their relationship with your business. In other words, it’s the total amount of money a customer is expected to spend with you.
This metric is an important factor as you strategize how to write a business plan. It helps you understand how valuable a customer is to your organization throughout your whole relationship with them rather than during one transaction.
In addition to value, this metric can help you understand customer retention and loyalty and help you make more accurate financial projections. This can have ramifications for many things, from your small business budget to your plans for future growth.
Why Customer Lifetime Value Matters
Higher customer lifetime value suggests that your customers are loyal to your company and its products or services. When a customer buys from you consistently and/or frequently over a longer period of time, their CLV is likely to be higher than that of a one-time purchaser. Knowing what kind of customers tend to have the highest CLV matters because it helps you understand your customer base and who you should be targeting to maximize profits.
It’s generally much cheaper to retain customers and keep selling them your products and services than it is to acquire new customers and try to develop relationships with them. Doing what you can to increase overall customer lifetime value — through better marketing and products — can be a cost-effective way to boost results.
Customer Lifetime Value Formula
There are several ways to calculate customer lifetime value, and how you choose to do so may depend on your industry and pricing model. Many businesses take a look at historical data, which is the simplest method. Other, more complex methods may factor in predictive analytics, discount rates, or variable pricing.
One useful formula for calculating customer lifetime value for a single customer is:
Customer lifetime value = (Average revenue per customer × customer lifespan) − Total costs to serve
This formula works best if you can use trustworthy historical data and have a consistent pricing model. Note that this formula provides you with the net CLV, since it takes the costs of customer acquisition into account. Gross CLV is simply the average revenue per customer multiplied by the customer lifespan.
Customer Lifetime Value Calculation Example
Let’s look at how the formula works, using a fictional example. Imagine you have a customer who spends $5,000 per year over the course of five years buying from your company. When you multiply those two numbers, you get the gross customer lifetime value, which is $25,000. Now, let’s say it costs $5,000 to serve this customer. Subtract that and you get a net customer lifetime value of $20,000.
($5,000 x 5) – $5,000= $20,000.
Factors That Affect Customer Lifetime Value
Here are some of the most significant factors that can affect customer lifetime value. Understanding these can help you develop better business growth strategies.
Product and service quality: Reliable products and services at a fair price are ultimately one of the biggest contributors to customer lifetime value. Without them, customers won’t stick around.
Customer service: Customers also want to be served well at every stage of their relationship with you, beginning with onboarding and continuing through product support after a purchase. They will look for clear and consistent communication, quick response times, and frictionless interactions. Track customer satisfaction to understand how to serve customers better and address problems before they lead to a crumbling relationship.
Product adoption: As we’ve already mentioned, it’s easier to sell your products and services to an existing customer. The more a customer increases their usage and adopts more of your products, the greater their customer lifetime value is likely to be.
Support costs: Maintaining a customer relationship will cost you money. That’s why it’s important to track how much you spend to support a customer in addition to how much they spend with your company. You may find that some customers are relatively more expensive and your relationship may not continue to grow. Others may be easy to work with, cost you less, and continue to purchase your products. These are the customer relationships you might want to focus on.
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How to Improve Customer Lifetime Value
Increasing customer lifetime value is important when you’re looking for how to improve business performance. It can also have other knock-on effects, such as making it easier to acquire small business financing. There are several important levers you can pull.
Offer discounts and other perks: To motivate customers to continue coming back, you might offer loyalty programs, such as discounts and perks. For example, you could provide a discount code to customers who spend a certain amount with you or to those who opt in to autorenew a subscription service.
Increase average purchase value: You could also look for ways to increase the value of the purchases your customers make. For instance, you might offer free shipping on orders over a certain amount. You might also promote products that are relevant to particular customers to try to increase their spending.
Increase product and service value: When customers are loyal to you, they may be more willing to buy products and services that are more expensive, as long as they are valuable to them.
Improve customer service and streamline experiences: Customers want their interactions with you to be easy and pleasant. Streamline onboarding and make sure to offer support for new customers figuring out a new-to-them product or service.
Make sure that interactions with customers are positive experiences with good communication and effective problem solving. This requires customer support representatives to have strong knowledge of the products and services they are helping with.
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The Takeaway
What is customer lifetime value? It’s a powerful lens for evaluating the worth of your customer relationships. By understanding what drives customer lifetime value — from product quality and customer service to support costs and purchase frequency — you can make more informed decisions about where to invest your time and resources. Focus on retaining the customers who matter most, and look for opportunities to deepen those relationships over time. Businesses that do this well build loyalty that can pay off for years to come.
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FAQ
What is a good customer lifetime value?
As a general rule of thumb, you might consider a good customer lifetime value to be equal to three times your customer acquisition cost (CAC). Your CAC is the amount of marketing and sales costs that are required to acquire one paying customer.
What is the difference between CLV and LTV?
Customer lifetime value and lifetime value (LTV) are the same metric, they just go by different names.
How does customer lifetime value relate to customer acquisition cost?
Customer acquisition cost (CAC) is the amount of money you spend on marketing and sales to acquire a new customer. Customer lifetime value (CLV) then tells you how much money you can expect to make from that customer. Together, the two metrics can help you better understand your business’s health and profitability.
What industries benefit most from tracking customer lifetime value?
Customer lifetime value tracking works best for industries that have recurring revenue models and repeat purchases. The metric can help you understand which customers are most valuable to your business and where to direct business resources for growth.
How often should customer lifetime value be calculated?
You may want to track customer lifetime value at least quarterly to stay on top of trends. However, if you’re running a fast-moving business, you may want to track it monthly.
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