You'll see a 60-70% success rate in your sales processes targeting existing customers compared to just 5-10% when targeting new customers. 

If you need to improve your customer relationships and increase CLV metric but don't have countless hours to jump from one resource to another, you are in the right place.

In this guide, we’ll walk you through everything you need to know about customer lifetime value (CLV), from what it is to how you can calculate and optimize it. By understanding key aspects like customer service, which directly impacts CLV, you can make informed decisions to improve customer retention and drive long-term success.

Let's dive right into it!

What Is Customer Lifetime Value (CLV)?

Customer lifetime value is a metric that determines how much profit you can expect to generate from a customer until they move on from your brand. It considers the average duration of your customer's relationship with your business, their repeat purchases, and their initial purchase to determine the net profit you will generate.

It measures and helps you understand the current state of customer loyalty your brand enjoys. If you’re seeing a conversion rate of 20-30% for first-time buyers becoming repeat customers, your CLV is likely on the right track. Monitoring this rate will help you understand the level of customer loyalty your brand enjoys.

Identifying your CLV is an effective way to convince potential investors and stakeholders how sustainable your business is, something you can highlight in your pitch decks when convincing them to invest.

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2 Customer Lifetime Value Models

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You have 2 options to measure your brand's customer lifetime value, each with completely different outcomes. See what closely matches your goals and needs.

1. Historical Customer Lifetime Value

Historical customer lifetime value only considers past data to predict a customer's value and ignores whether or not a customer continues their journey with you. This model uses average order value to figure out your customers' value.

If most customers only interact with your business for a specific period, this model is more suitable than the other model. But keep in mind that this model has a few drawbacks. It assumes all your customers' journeys are identical when, in reality, they're not.

For example, your valuable active customers could distort how accurate your data is if they become inactive. Conversely, inactive customers, often overlooked in this model, might start purchasing again.

Use this approach if your business relies on project-based services, like Vidpros, all video editing services often tapped for specific campaigns or periods. These businesses can leverage historical data to tailor their marketing strategies during peak times.

2. Predictive Customer Lifetime Value

Predictive customer lifetime value uses machine learning to predict new and existing customers’ buying behavior. This highlights ways to improve customer retention, your star products or services, and your most valuable customers.

Assume you're running an electronics store and find that customers who buy a high-end laptop from you are more likely to return for an update or related accessories within 6 months. You can target high-value customers with early access to new products or discounts on accessories to increase their chances of becoming repeat customers.

How To Calculate Customer Lifetime Value

As you learn how to calculate your customer lifetime value (CLV), consider the areas where you can fine-tune your strategies. 

The Customer Lifetime Value Formula

Before calculating customer lifetime value, calculate the 2 metrics required for this formula: customer value and average customer lifespan using the following formulas:

Customer Value = Average Purchase Value x Averages Number of Purchases

This tells you how much revenue, on average, each customer contributes during their interactions with your business. A high result suggests that your customer engagement is strong and that your product or service is valuable to the reader. This varies per industry and product but on average you are looking at $500-$5,000/customer.

Customer Lifetime Value = Customer Value x Average Customer Lifespan

This formula gives you the total revenue a customer is expected to generate over their entire relationship with your business. A higher CLV suggests more profitability per customer.

The CLV formula is:

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Once you’ve calculated your CLV, you can then make the following decisions based on your results:

• If your CLV is high, consider segmenting these customers for personalized marketing campaigns, loyalty programs, and exclusive offers to retain them longer.
• If your CLV is lower than expected, focus on enhancing customer service, improving product quality, or implementing loyalty programs to increase the average lifespan and value of each customer.
• Use the CLV to evaluate your customer acquisition costs. Ensure that the cost of acquiring new customers is justified by the revenue they generate over their lifetime with your business.
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How To Calculate Customer Lifetime Value In 5 Steps With Example

If you're overwhelmed with calculating your customer lifetime value (CLV) for the first time, these manageable and easy-to-follow steps will help. 

Let's walk through the process of using a business with a subscription-based nature for an in-demand industry like this social media analytics platform.

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Step 1: Calculate The Average Purchase Value

How much revenue do you generate, on average, from 1 purchase?

For example, if Keyhole charges $150 monthly for its services, that would be the average purchase value. This number helps you understand the revenue each customer brings in.

Step 2: Determine The Average Purchase Frequency Rate

How often do your customers purchase within a specific time frame?

Keyhole clients typically subscribe monthly, so the average purchase frequency rate of 12 times/year, assuming a yearly subscription.

Step 3: Measure The Average Customer's Value

Multiply the average purchase value by the average purchase frequency rate to find your average customer value. 

The average customer value for Keyhole would be:

$150 x 12 = $1,800/year.

Step 4: Calculate The Average Customer's Lifetime Span

How long does a customer remain loyal to your business on average?

Let's assume Keyhole customers remain subscribed for 3 years. This is their lifetime span.

Step 5: Calculate Customer's Lifetime Value

After the previous 4 steps, you're finally ready to calculate your customer's lifetime value.

Using the Keyhole example, their average customer lifetime value would be:

$1,800 x 3 = $5,400

5 Must-Track Customer Lifetime Value Metrics To Remember

The following are the 5 important metrics you need in your toolkit to make informed decisions impacting your long-term growth and profitability. As you explore these, think about how they apply to your business.

Consider whether these metrics are fully optimized or if you still have room for improvement. 

1. Customer Acquisition Costs

This isn't a factor in most CLV formulas, but it's useful to add in a CLV analysis. Comparing customer acquisition costs with their lifetime value helps in:

• Finding opportunities to improve customer acquisition and customer retention rates.

• Distributing resources wisely.

• Deciding how effective your sales and marketing strategies are.
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2. Average Customer Lifespan

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You'll need the average customer lifespan when calculating CLV. This figure can help you:

• Identify the reasons behind customer churn and address them proactively.
• Enhance loyalty programs to extend customer relationships and increase CLV.
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3. Customer Value

Customer value determines your customers' purchasing habits to help you segment your customers. Here are some ways to use the results of this metric:

• Segment your customers based on their value and create targeted campaigns for high-value segments.
• Use insights from customer value data to optimize product offerings and pricing strategies.
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4. Average Purchase Frequency Rate

You'll enjoy more than a 25% increase in profit with a simple 5% increase in customer retention. The APFR metric will show you where to:

• Implement loyalty programs or subscription models to encourage repeat purchases.

• Analyze purchasing patterns and introduce relevant upsells or cross-sells.
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5. Average Purchase Value

The average purchase value is the revenue each customer contributes during a specific period. It helps you:

• Focus on upselling and cross-selling to increase the value of each transaction.
• Regularly review and optimize your pricing and packaging strategies to align with customer expectations and increase transaction sizes.
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Why Is Customer Lifetime Value Important?

Understanding customer lifetime value helps you make informed business decisions based on your customers' average lifespan and lifetime value. For example, if you're spending $100 on marketing efforts to acquire new customers and your customers bring an average of $500 to your business in their lifetime, you can use the $400 profit to justify your marketing spend.

Here’s a more specific look at the benefits.

1. You Can Improve Product Development & Refinement Strategies

Increasing customer retention rates by 5% can increase profits by 25% to 95%. 

Calculating CLV lets you identify which products or services are most valued by your loyal customers. With this, you will know how to improve your products and what features you can add so you can provide what truly resonates with your customers.

• Use customer feedback to refine product features or services.
• Implement tools that help you analyze which products or services contribute most to your CLV.

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If you are in the dropshipping business, you can identify optimal pricing strategies using automated repricer tools like Aura. They provide real-time data on customer behavior and pricing effectiveness that you can leverage to adjust your offers and prices to better meet customer needs, thereby enhancing CLV.

2. CLV Simplifies Financial Planning

Businesses with a strong CLV can predict revenue streams more accurately and make better financial decisions.

By understanding CLV, you can forecast future cash flows based on customer behavior to make informed decisions on product development, hiring, and budget allocation.

• Use CLV data to adjust your marketing spend and focus on high-value customer segments.
• Align your product development and marketing strategies with the needs of your most profitable customers.

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If your business operates on a subscription model, calculating CLV can help you project future revenue and plan for scaling operations. For example, if each customer is worth $1,200 over 3 years, acquiring 100 new customers would generate an additional $120,000.

3. Customer Acquisition Costs Are Lowered

Acquiring a new customer can be 5x more expensive than retaining an existing one.

Focusing on increasing CLV reduces the need for costly customer acquisition efforts. By retaining your existing customers, you can lower marketing costs and improve profit margins.

• Develop retention strategies such as loyalty programs or personalized communication to keep existing customers engaged.
• Monitor referral programs that encourage satisfied customers to bring in new business, often resulting in higher CLV.

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Medical Alert Buyers Guide offers a great example of effective customer retention strategies on its website. They come with a system for regular product and recommendation updates and are tailored to different customer journey stages. This helps maintain long-term relationships because they make sure customers always have access to the most current and relevant content.

For instance, their website features a detailed comparison tool that helps customers find the best product for their needs.

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4. It Helps Target Your Ideal Customers

A 5% increase in customer retention can increase profitability by up to 75%.

CLV allows you to segment your customers based on their value to your business, enabling you to tailor your marketing strategies more effectively.

• Focus on creating personalized marketing campaigns for your highest-value customers.
• Allocate resources to segments that show the highest potential for long-term profitability.

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Use CLV data to create customized marketing plans that resonate with your top customer segments, thereby maximizing the return on your marketing investments.

5. It Boosts Customer Retention & Loyalty 

Companies that use CLV data to drive their customer strategies can achieve up to 60% higher customer retention rates.

Measuring CLV helps you understand customer behavior and preferences, enabling you to make data-driven decisions that enhance customer loyalty and retention.

• Introduce loyalty programs and personalized offers for customers with high CLV.
• Optimize customer support to address pain points and increase satisfaction.

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A simpler way to add value for your customers and enhance their overall experience is by providing resources and tools that simplify their decision-making and purchase process. This comprehensive Google Flights blog is an excellent example of how to achieve this where they use detailed guides on how to find the best flight deals and tips for flexible travel planning.

For example, the blog covers topics such as "How to use price alerts" and "Best practices for booking flights at the lowest prices." These pieces of content directly address common questions and pain points, providing users with actionable advice they can immediately apply.

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6. Your Revenue Increases Over Time

Companies that focus on CLV can see their revenue grow by 5-10% per customer annually.

As you refine your customer segmentation and marketing strategies based on CLV data, you can target customers who are likely to generate higher revenue over time.

• Use upselling and cross-selling techniques to increase the average transaction value of high CLV customers.
• Customize your products or services to better meet the needs of your most valuable customer segments.

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By segmenting customers based on their CLV, you can identify those most likely to engage in repeat purchases and tailor your marketing efforts accordingly, leading to sustained revenue growth.

4 Common Customer Lifetime Value Mistakes To Avoid

Have you tried boosting your CLV in countless hours and resources but have failed time and time again? Find out if you're making any of the following mistakes.

1. Becoming Inflexible

Unpredictable factors like inflation, recession, or rising production costs can disrupt your business and reduce CLV, forcing price increases.

When unpredictable situations arise, stay flexible. For example, you can change things based on current trends instead of following the same CLV methods forever. To stay updated with these trends, use Clootrack to monitor real-time customer sentiments and feedback.

Let's assume you used Clootrack and noticed that your customers are concerned with the recent price spike and the value they're receiving in return. This change calls for a revisit of your CLV and possibly lowering it based on price-sensitive customer segments.

2. Setting An Unrealistic Expectation For CLV

No matter how hard you try, it's normal to have some customers abandon your service or product. Be realistic when setting your CLV. Don't expect all of your customers to end up with a high CLV, but still think of ways to appeal to your target demographic.

My favorite example of this is the recruiting industry. Most recruiting agency owners make the mistake of setting a very high CLV, only to realize the business is not as profitable as anticipated.

For this, use Recruiterflow to analyze your client data and categorize them based on hiring frequency, company size, and engagement duration. This will help you adjust your CLV expectations, focus on high-value customers for retention strategies, and develop efficient approaches for lower-value clients.

Let's assume you discovered that a few of your larger clients have a high CLV while others only interact with your business occasionally.

You'll use this data to readjust your CLV expectations, focus on high-value customers for your retention strategies, and develop appropriate, low-effort strategies for your lower-value clients. 

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3. Wrong Segmentation

Effective customer segmentation gives you a clear picture of how your customers behave and what sets them apart. By targeting specific segments with tailored campaigns, you’ll see better results because your approach will resonate more with their needs. But be careful—if your segmentation is off, you could be wasting valuable resources.

Start by reviewing your current segments and pinpoint any inaccuracies. For instance, if you've grouped customers solely by their location, you might miss out on the diverse preferences within that region. Instead, create segments based on more meaningful criteria like engagement level, customer lifetime value (CLV), product preferences, and how often they purchase.

4. No Segmentation

You’ve probably heard the saying, “If you’re marketing to everyone, you’re marketing to no one,” and it’s spot on. Create specific customer segments and direct your marketing efforts using these.

Take a close look at your customer base and segment them wisely. Identify those who frequently purchase or engage with your brand, those who stick to specific products, and those who explore various product categories. Tailor your marketing strategies to these segments to ensure your efforts are hitting the mark.

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Conclusion

As you apply these insights, ask yourself: How well do I truly understand the value each customer brings to my business? 

Measuring and understanding your customer's lifetime value builds a sustainable and profitable business. With these, you are equipped to make smarter decisions in customer retention, product development, and marketing strategies.

To enhance these retention efforts further, Glassix offers messaging tools that boost customer communication—key drivers of a strong CLV. Communicate with your clients whenever and wherever they are. Check out our solutions today.