When you calculate customer lifetime value, you’ll get a concrete monetary value for how much your customer is worth — in dollars.
How is Customer Lifetime Value (CLV) calculated?
If you’re wondering how to calculate the average lifetime value of a customer, you’ve come to the right place.
Customer Lifetime Value is calculated by using the following formula as the simplest equation:
CLV = revenue from a single customer over their lifetime – the cost of acquiring them
If you’re not sure how much a customer has spent over their lifetime, use the equation below:
CLV = (average annual revenue from a single customer X number of years) – customer acquisition cost (for that customer only)
If you want to calculate your CLV without any manual calculations, we have a calculator for that! The best part? It’s free, it’s easy, and it gives you results immediately. Try it below!
Not only does your customer lifetime value, or CLV, give you better insight into how much you can comfortably spend on customer acquisition, but it can also help you set clear, strong marketing goals.
On this page, we’ll talk about what customer lifetime value is, why it’s important, and how to calculate customer lifetime value.
If you’d like to learn more about customer lifetime value, keep reading! If you’d rather speak to a specialist directly, give us a call at 888-601-5359!
What is customer lifetime value?
Customer lifetime value refers to the monetary value that a customer contributes to your business over their lifetime. “Lifetime” in this case refers to the time that passes between a customer’s first transaction and the moment they churn or end their relationship with you as a customer.
It’s important because it gives you insight into the value of specific customers, which helps you build your ideal marketing persona for the future.
Not to mention, it can also help you spot where you’re overspending on advertising.
Why is customer lifetime value important?
In addition to asking yourself, “how do you calculate customer lifetime value,” you’re probably wondering why CLV is so important in the first place.
You likely know that customer lifetime value is extremely important to your marketing model — so let’s talk about why.
Simply put, it’s more expensive to attract and acquire new customers than it is to keep existing loyal ones. In fact, it costs 10 times more to earn new customers than it does to retain existing ones — which is why it’s important to look at your Lifetime Value (LTV) and CAC ratio. We’ll explain this more in the customer lifetime value example in our next section.
Customer lifetime value is important because it:
- Informs your marketing strategy: When you continuously track customer lifetime value, you’ll likely begin to see a pattern in those who have the highest customer lifetime value. For example, they might have similar demographic information or similar interests. Over time, you’ll be able to create a persona for your most valuable customer based on customer lifetime value. When you put together that persona, you’ll know exactly who to market to in order to acquire customers who are likely to provide you with a high CLV.
- Helps you save money: Overall, calculating your CLV helps you save money. Like we mentioned before, you’ll have a better idea of how much you can realistically spend on advertising to still make a profit.
Customer lifetime value example
Remember how, earlier, we mentioned that it’s more cost-efficient to retain customers than it is to acquire new ones?
Let’s say that you run an online store that sells t-shirts.
For this customer lifetime value example, we’ll consider a single loyal customer. This customer buys an average of five shirts every year, for seven years until they churn. At $20 per shirt, that customer has a yearly value of $100, or $700 over the course of their lifetime as a customer.
Now when you advertised that shirt, it cost you $10 to do so. That means that one loyal customer had a customer lifetime value of $690.
Now let’s look at another situation.
This time, you acquire five new customers that also churn after seven years. The difference? They only buy one shirt per year. That means that you made $700 from those five new customers over seven years.
The difference? You paid to advertise to each of those five customers — meaning that instead of your advertising cost coming in at $10 like the above example, your advertising cost is now $50. Meaning that you only made $650.
When you divide that $650 by five, you get $130 — meaning each customer’s individual lifetime value is only $130 as opposed to the last customer who had a lifetime value of $690.
With this customer lifetime value example, you can see how it’s more cost-effective to retain a single customer than it is to attract and acquire new ones.
How can you improve your CLV?
If you’re unsatisfied with your current CLV, it’s time to act. Although you won’t improve the metric overnight, here are a few ways to increase it over time.
Create a loyalty program
One of the biggest factors of CLV is how long a customer has been loyal to your company. The longer someone’s been a customer, the better the CLV.
If you can find a way to keep customers coming back, like a loyalty program, you’ll be able to steadily boost your CLV.
When you create your loyalty program, it’s important to provide bonuses along the way to keep users interested. For example, every year you might offer a hefty discount for one of your most expensive items. Or, you might provide punch cards that provide a free item when users spend so much.
The point of creating a loyalty program is not just to retain customers, it’s to keep them spending, so you’ll want to consider both.
Provide surveys on customer satisfaction
Customers can stop being loyal to your company for all kinds of reasons, but one of them is dissatisfaction.
In order to get a good read on why customers aren’t staying loyal, you should provide surveys that measure customer satisfaction.
For example, you might choose to provide the survey when a customer asks to unsubscribe from your mailing list or stops a recurring service.
This survey can give you a lot of insight into what you could do in the future to better retain customers and increase your CLV.
Create something that customers can’t refuse
If you create content that keeps users coming back for more, or create a project that your customers can’t resist, you’ll be set as far as customer lifetime value.
You get what you give — if you put the time and effort into creating stellar content, for example, users will be more likely to continuously visit your site to read it. Similarly, if you put in the research, time, and effort to create a product that is unlike any other, you’re bound to attract customers that have a high customer lifetime value.
Make sure you’re targeting properly
Targeting the right audience in the first place has a lot to do with customer lifetime value.
For example, let’s say you manufacture bakeware. Instead of making your target audience a cake shop owner who needs your products continuously, you target users who love to bake, but who might buy once and churn quickly.
If you take the time to make sure you target your most valuable audience upfront, you’ll be more likely to attract customers who provide a higher customer lifetime value.
The benefits of calculating your CLV
Knowing your customers’ lifetime value has numerous benefits for your business’s success in the long run. Some of these benefits include:
- Knowing how to invest your time with your most loyal and important customers, while being able to identify customers or clients that require more nurturing for a higher CLV and retention rate. By measuring customer lifetime value, you can adapt to your customers’ habits and act accordingly.
- Your CLV helps you determine the quality of your product or services. Having a low CLV means that your customers are unaware of your services’ benefits, or that your products or services are not satisfying their needs as you thought. In either case, you can identify and rectify the issue to increase your CLV and client retention rate.
- Being aware of your CLV helps you budget your marketing efforts. By knowing how much you make from a particular type of customer, you can calculate the appropriate spend for acquisition or retention.
WebFX can help you improve your CLV
Are you less than satisfied with your CLV? Do you think that you’re spending too much on advertising costs? WebFX is here to help!
We’re a full-service digital marketing agency that can help you achieve the highest possible CLV, as well as take inventory of your current ad strategy to ensure that it’s cost-effective.
We specialize in digital advertising, too, which means we can help you design, create, and launch PPC ads that fit within your budget and attract your most qualified customers.
In teaching you how to calculate customer lifetime value, you understand that it’s extremely important to your marketing strategy, and in fact, can make or break your business.
If you want to call in the professionals, WebFX would love to hear from you!