What Is Customer Lifetime Value and How to Calculate It

As a business owner, you’re juggling a lot—finding new leads, keeping existing customers happy, and making sure every pound you spend is worth it. 

But here’s a question: are you focusing your sales and marketing efforts on your most valuable customers—those who will bring the highest revenue to your business? 

That’s where understanding customer lifetime value (CLV) can make all the difference. But what is the customer lifetime value?

In this guide, we’ll break down everything you need to know about this essential metric—from how to calculate customer lifetime value to how to use it and make smarter business decisions. We’ll also explore the benefits of tracking CLV, the meaning of other relevant financial metrics and strategies for improving your figures. 

What is customer lifetime value?

In the business world, understanding the market, competitors, and customer behaviour is key to long-term success. That’s where financial metrics like customer lifetime value (CLV) come in handy.

Customer lifetime value is the total revenue you can expect to earn from a single buyer throughout their entire customer journey with your business. Simply put, it’s a way to evaluate your business relationship with clients and predict how much revenue they’ll bring over time. This includes both the money they’ve already spent and what they’re likely to spend in the future.

Rather than focusing solely on individual purchases, CLV looks at the entire relationship you build with a customer. The longer a customer continues to shop with you, the higher their average lifetime value becomes. And the higher the CLV, the more valuable that customer is to your business.

While attracting new customers is important, keeping your existing ones is often even more important. That’s because long-time customers tend to spend more over time and customer acquisition costs are typically higher.

Customer lifetime value models 

Customer lifetime value can be measured using two main models: historic and predictive. Which one you choose depends on whether you want to understand how much value a customer has already brought to your business or estimate how much value a customer is likely to bring in the future. 

Each model gives you unique insights. But here’s the kicker: the best results come from using both models together. 

Historic customer lifetime value

The historic model calculates customer lifetime value based on past data. It assesses how much an existing customer has spent with your business from the very start of their relationship with you up until now. By analysing this information, you can estimate the value the customer has brought to your business so far.

While this approach is straightforward, it does have limitations. One major drawback is that it doesn’t account for whether the customer will continue to do business with you in the future. And as you know, not every customer journey is the same—they can change over time.

For example, some customers might spend a lot at the beginning of their relationship with your business but taper off later. This can skew your data and make it seem like they’re more valuable than they actually are in the long run. Conversely, customers who’ve been less active so far might start buying more frequently in the future, but the historic model won’t capture that potential.

Predictive customer lifetime value

The predictive model uses advanced algorithms, including regression analysis and machine learning, to estimate the future value of your customers. By analysing past patterns, this model forecasts how long a customer relationship is likely to last and predicts what the value of new and current customers will be.

Predictive customer lifetime value provides more realistic data because it takes into account factors like the average purchase frequency rate, customer acquisition costs, and business overheads. 

While the predictive model may seem more complex, it can help you more accurately identify your most valuable customers and how to improve customer retention.

Benefits of tracking customer lifetime value

Tracking and analysing customer lifetime value helps you see the big picture: the revenue each customer brings to your business over time. And when you understand that, you can make smarter decisions that save money, build customer loyalty and grow your business.

Here’s how measuring CLV can be beneficial to your business:

• Smarter marketing budgets: By knowing who your high-value customers are, you can focus your marketing efforts on the people who are most likely to buy from you again. No more wasting money on campaigns that don’t resonate.
• Improved customer satisfaction and retention: Happy customers stick around longer. When you understand what keeps your most loyal customers coming back, you can create strategies to encourage repeat purchases and improve the overall customer experience. 
• Better customer segmentation: CLV helps you identify your most valuable customers and target them more effectively. You’ll know which groups to prioritise and how to tailor your offerings to meet their needs.

In short, tracking CLV gives you a clear understanding of your customers’ shopping habits and how well your business is performing. Once you have this data, you can take actionable steps to improve customer retention and boost overall revenue. 

After all, you can’t fix what you don’t understand, and you can’t understand what you don’t measure. 

Components of customer lifetime value

Before diving into how to calculate customer lifetime value, it’s important to understand the different components that contribute to this essential metric.

Average purchase value

Average purchase value (APV), or average order value, refers to the average amount of revenue one customer generates during a specific period. This metric doesn’t just help you calculate CLV—it also shows whether your pricing strategy is working and highlights opportunities to increase transaction value through cross-selling or upselling.

To calculate APV, divide your company’s total revenue generated by all customers over a given period (typically one year) by the number of purchases made during that period.

APV = Total Revenue / Total Number of Purchases

Average purchase frequency rate

Average purchase frequency rate (APFR) shows how often customers make repeat purchases. This metric gives you insight into customer engagement, brand loyalty and even shifts in customer behaviour. Understanding APFR can also help you predict future revenue streams.

To calculate APFR, divide the total number of purchases within a specific period by the number of unique customers who made purchases during that time. 

APFR = Total Number of Purchases / Number of Unique Customers

Averagecustomerlifespan

Averagecustomerlifespan (ACL) represents the average length of time a customer continues to purchase from your business. This metric is useful for making budgeting and resource allocation decisions, as well as for designing strategies to improve customer retention and build stronger customer relationships. 

To calculate ACL, you first need to measure customer lifetime—the average number of years a customer stays active with your company. Estimating customer lifespan can be tricky, especially if your business has a wide range of customer retention rates. Using robust data management software is important here to ensure accuracy and avoid duplicate customer records in your CRM system.

Once you know your customer lifespan, calculate ACL as follows:

ACL = Total Customer Lifespan / Number of Customers

Customer retention rates

Customer retention rate (CRR) is the percentage of customers a company retains over a given period. This metric is a key indicator of the longevity and profitability of your customer relationships. It is also often measured alongside CLV to help merchants better understand the long-term results.

The formula for CRR is slightly more complex compared to the other but it’s still nothing scary. 

Here’s what you’ll need:

• Starting customers (S): The number of customers at the beginning of the period.
• Ending customers (E): The number of customers at the end of the period.
• New customers (N): The number of customers acquired during the period.

To calculate CRR, subtract N from E to find the number of retained customers. Then, divide this result by S, and finally, multiply by 100 to express the result as a percentage.

CRR = [(E – N) / S] × 100

How to calculate customer lifetime value

There are multiple customer lifetime value calculation methods, but in the end, they all determine how long a customer is likely to stick with you and how much revenue they’ll bring in during that time.

To get started, you’ll need two things: a large enough sample size and a clear understanding of your target customers. The more data you have, the more accurate your calculation will be. Additionally, knowing who your ideal customers are helps you tailor your efforts to attract and retain the right audience.

Basic customer lifetime value formula

The simplest way to calculate customer lifetime value is by multiplying three key metrics: the average purchase value, the average purchase frequency rate and the average customer lifespan. 

The formula looks like this: 

CLV = Average PurchaseValue × AveragePurchaseFrequencyRate × AverageCustomerLifespan

For example, if a shopper spends on average £50 per purchase, makes 10 purchases annually and remains your client for 5 years, the final result using the basic customer lifetime value formula will be: 

£50 × 10 × 5 = £2,500.

This means that the customer contributes £2,500 to your business over their customer lifecycle.

Keep in mind that you might come across slightly different terms or variations of this formula. For instance, some people combine the average purchase frequency rate and average customer lifespan into a single metric called average customer value. While the labels might change, the core idea remains the same.

Advanced predictive models

While the basic CLV formula provides a good starting point, advanced calculations can offer deeper insights and more accurate data to guide your business decisions.

For instance, incorporating your customer acquisition costs (CAC) into the equation can help you understand the actual profit you’re making after accounting for the expenses of acquiring new customers. This gives you a clearer picture of whether your marketing and sales performance efforts are paying off. 

To calculate CLV while factoring in CAC, you can subtract the average cost of acquiring and serving customers from the result of the basic formula. 

Here’s how to determine that average cost:

1. Add up all the expenses related to acquiring and serving customers.
2. Divide this total by the number of customers.

Additionally, you can refine your CLV calculation by considering other key metrics like profit margins or churn rates. Including these additional metrics gives you a more realistic view of your customer value and future cashflow.

If all these numbers and formulas feel overwhelming, don’t worry—it’s completely normal to find it challenging to track all these details while managing your daily operations. That’s why using dedicated software can be a game-changer. These tools can automate calculations, save time and effort, and even refine the data for different customer segments.

Customer segmentation in CLV

Not all customers are the same, hence, their interactions with your business can vary widely. That’s where customer segmentation comes in. By dividing your customers into groups based on demographics, behaviour or purchase patterns, you can calculate more meaningful CLV figures.

For example, loyal, repeat customers often deliver high customer value because they buy more frequently and consistently compared to occasional buyers. Similarly, high-spending customers can significantly impact your profit in a shorter time frame, while younger customers might have a longer potential lifespan with your business.

So, how can you integrate customer segmentation into your CLV calculations? 

Start by defining your customer segments. This means grouping customers by similarities—whether it’s their location, age, spending habits or purchase frequency. Once your segments are defined, calculate the key metrics for each group, such as average purchase value, purchase frequency rate and average customer lifespan.

With these metrics in hand, you can calculate the CLV for each segment. Then, compare the results to identify which groups are driving the most profit. This will help you focus your marketing efforts where they are needed most.

How to improve customer lifetime value

Now that you’ve calculated your CLV figures, how do you use this information to grow your business? Let’s explore some practical tips to help you increase customer lifetime value.

Enhancing customer retention

To increase CLV, the key is to reduce churn and encourage customers to keep coming back. 

One highly effective strategy is implementing a loyalty program. By giving customers the chance to earn and redeem rewards at checkout, you enhance their engagement, encourage repeat visits, and increase the likelihood of bulk purchases. Over time, this helps build strong customer relationships.

Another approach is creating personalised offers. Take the time to analyse your customers’ preferences and tailor your offerings accordingly. You can gather customer feedback through surveys, reviews or online comments. You will quickly see how addressing your customers’ pain points can significantly boost satisfaction, making them more likely to return and shop with you again. 

Increasing purchase frequency and value

Another way to improve CLV is by increasing the average value of purchase. Simply put, this means encouraging customers to shop more often or spend more during each transaction. 

The good news is that once you’ve calculated your CLV, you can use it to identify opportunities for cross-selling and upselling. For instance, you might suggest complementary products or services alongside their purchases or bundle items at a discounted price. These strategies not only boost transaction values but also keep customer acquisition costs down.

Gift cards and vouchers can also play a role in increasing purchase frequency and value. By marketing them as gift options for loved ones, you provide an easy solution for your existing customers when they are in need of a present. Simultaneously, you attract new clients, who will be inclined to spend more when they already have a certain amount pre-loaded onto their gift card. 

Finally, offering incentives such as discounts for reaching specific thresholds can further encourage customers to add more to their carts, boosting both purchase frequency and value.

Building strong customer relationships

Achieving high customer lifetime value isn’t possible without fostering strong and long-lasting customer relationships. If you don’t establish trust and connection with your clients, it’s unrealistic to expect them to return, shop frequently and remain loyal to your business for years to come.

To build these relationships, it’s essential to focus on engaging with your customers at every stage of their journey with your business. This means creating memorable and smooth interactions—whether through personalised communication, thoughtful touches, or impeccable service. 

And finally, ensure your customer support is top-notch. This is a critical factor in creating a smooth experience throughout the whole customer journey. Buyers need to feel confident that if they have questions or issues, you’ll be there to listen and resolve them promptly.

Tips for measuring and analysing customer lifetime value

Tracking customer lifetime value helps you understand what’s working, what’s not and where to focus your efforts. It’s a powerful tool to guide your business decisions if used correctly. 

But to get the most out of your CLV calculations, you need to track metrics consistently. Customer behaviour and market conditions change over time and regular updates to your data ensure you’re working with accurate, up-to-date information. This way, you can spot trends, identify your best customers and adjust your strategies before small issues escalate.

The good news? You don’t have to do it all manually. Tools like CRM software make it easier to collect and analyse customer data. They can help you monitor patterns, predict future shopping patterns and even forecast sales revenue. 

Practical applications of customer lifetime value

We’ve discussed how CLV can help your business, but now let’s dive into how you can actually put the insights you’ve gathered to work and improve different aspects of your operations. 

Optimising marketing efforts

Your customer lifetime value data can be a game-changer for your marketing strategy. Instead of trying to reach everyone and stretching your budget too thin, focus on the customers who bring in the most revenue over their lifetime.

For instance, you can offer exclusive deals, personalised experiences, or loyalty rewards to your top spenders.

CLV also helps you cut down on customer acquisition costs. Once you’ve identified the audience most likely to become loyal customers, you can stop chasing leads that don’t convert and redirect your resources toward attracting and retaining the right people.

Improving product offerings

CLV isn’t just about numbers—it’s about understanding what your customers truly want. 

If you notice a trend where customers stop buying after a certain point, it’s a signal to reevaluate your offerings. Are there features they need that your product or service lacks? Could you solve more of their problems? Use CLV insights to refine your products or services to better meet their expectations.

Sometimes, the issue isn’t with your product but with customer engagement. Maybe your customers love what you sell but don’t have a reason to return. In this case, CLV data can reveal opportunities to introduce complementary products, new services or subscription models that keep them engaged for longer.

Strengthening financial planning

Customerlifetimevalue is a powerful tool for making smarter financial decisions.

By factoring it into your revenue projections, you can estimate how much income your entirecustomerbase will generate over time. This helps you plan for sustainable growth and allocate resources where they’ll have the most impact.

For example, if certain investments—like better customer service, new product lines or loyalty programs—deliver higher CLV, you’ll know where to focus your efforts for maximum return. 

Conclusion

Understandinghow to calculate customer lifetime value is important for every business, big or small. This valuable metric helps you assess your business performance, customerbehaviour, and financial health. 

Armed with these insights, you’ll know exactly where to invest your time and money to build stronger customer relationships and boost your bottom line.

So, don’t let the idea of metrics intimidate you. Start small, track your CLV numbers over time and use a dedicated tool to help you with the calculations and predictions. It’s a simple step toward sustainable growth and long-term businesssuccess.

Frequently Asked Questions

What is the difference between lifetime value and customer lifetime value?

CLV refers to the total amount of money a business can expect to earn from a single customer throughout their customer lifecycle. On the other hand, LV sometimes refers to the value of a customer, while other times it is used in broader contexts, such as the value of an asset or even a business over its lifespan. LV may not necessarily be tied to a specific customer.

Is customer lifetime value revenue or profit?

Customer lifetime value typically calculates the total amount of money a customer is expected to bring in over their entire relationship with your business. It doesn’t account for costs, so CLV refers to the revenue. However, some businesses calculate CLV by considering not just the revenue but also the associated customer acquisition costs. This is referred to as profit-based CLV, which provides a more accurate measure of customer value.

Is customer lifetime value considered a KPI?

Yes, CLV is an important KPI that helps businesses measure and track the long-term value of their customer relationships. It provides insight into how much revenue a customer is expected to generate over the entire course of their purchasing journey. Because of all the important insights it provides, CLV is a valuable KPI for businesses.