Customer lifetime value (CLV) is a metric that measures how much a business can plan to earn from the average customer over the course of the relationship. Differences in products, costs, purchase frequencies, and purchase volumes can make CLV calculations complex. However, with the right tools, you can find CLV in just a few clicks.
With an understanding of CLV, you can make better-informed marketing, sales, and other decisions. This guide goes deep into how to calculate CLV and how to improve it.
What Is Customer Lifetime Value (CLV)?
CLV is a measure of the total revenue and income a business can expect to bring in from a typical customer for as long as that person or account remains a client.
When measuring CLV, it’s best to look at the total average revenue generated by a customer and the total average profit. Each provides important insights into how customers interact with your business and if your overall marketing plan is working as expected.
For a more in-depth look, you may want to break down your company’s CLV into, say, customer quartiles from highest to lowest value. This segmentation can provide insights into what’s working well with high-value customers so that you can work to replicate that success across your entire customer base.
Note: There are multiple definitions of CLV: basic calculations that look only at revenue, and more complex equations that factor in gross margin. For the sake of simplicity, we’re using revenue throughout this article.
Key Takeaways
- CLV is a measure of how much revenue a company generates from the average customer over the entire relationship.
- Comparing CLV to customer acquisition cost is a quick, though inexact, method of estimating a customer’s profitability and the business’s potential for long-term growth.
- Businesses have several marketing tools to help them improve CLV over time.
- Looking at CLV by customer segment may offer expanded insights into what is and isn’t working well for your organization.
Customer Lifetime Value Explained
CLV boils down to a single number, but there may be significant nuances. By understanding the different parts of your CLV, you can test different strategies to find out what works best with your customers. Thanks to its simplicity, CLV can be an important financial metric for small businesses.
Let’s examine how a grocery chain may look at CLV. Based on data in the company’s ERP system, it can see that the typical customer spends $50 per visit and comes in an average of once every two weeks (26 times per year) over a seven-year relationship. The grocer can find its CLV by multiplying those three numbers (50 x 26 x 7) for a value of $9,100. But why does that number matter? We’ll dig into the details in the next section.
Are CLV and LTV the Same Thing?
CLV and LTV (lifetime value) both measure the total value a customer brings to a business throughout their relationship, using the same calculation. The terms are generally used interchangeably, but CLV tends to be more common in marketing and customer relationship contexts, while LTV is typically used in financial reports and investor communications.
Factors That Affect CLV
Three key factors influence how much value a customer brings to your business over time.
- How much value do your products provide to your customer? The perceived benefits and actual utility customers get from your products or services affects their willingness to pay premium prices and recommend your business to others. Higher value typically leads to increased customer satisfaction and loyalty.
- How frequently are the products purchased? More frequent purchases increase total revenue while creating additional opportunities for cross-selling and upselling.
- What is your customer’s relationship with your brand? The strength of customers’ connection to your brand influences how long they remain an active buyer and how resistant they are to competitor offerings. Strong brand relationships typically result in longer customer retention periods and higher CLV.
Customer Lifetime Value Models
Different CLV frameworks and formulas are used to segment customers, develop pricing strategies, determine marketing return on investment, and calculate business valuation. There are two main CLV models: predictive and historical.
Predictive CLV
Predictive CLV models use statistical methods or machine learning to forecast future customer behavior, such as purchase frequency and retention rates. Algorithms consider past purchasing behavior, demographic information, market trends, and predicted customer lifespan to inform strategic plans and future-oriented decision-making. Predictive CLV can account for changing market conditions and customer behaviors, but meaningful analysis requires specialized expertise or software.
Historical CLV
Historical models calculate CLV using data on past customer behavior and spending. It’s usually calculated by adding all the revenue generated by a customer (or the average customer) throughout their relationship with the business, minus the costs associated with acquiring and serving that customer. While more straightforward and easier to calculate than predictive models, historical CLV can still be used for basic forecasting, albeit with less sophistication than predictive models. Stable businesses with long-standing customer relationships may find historical CLV particularly useful for adjusting pricing strategies and identifying upsell opportunities. It can be less effective for new businesses or those in rapidly changing markets.
Why Is Customer Lifetime Value Important to Businesses? Why Does It Matter?
Why do businesses care about CLV? Here are a few key reasons.
You Can’t Improve What You Don’t Measure
Once you start measuring CLV and breaking down the various components, you can employ specific strategies around pricing, sales, advertising, and customer retention, with a goal of continuously reducing costs and increasing revenue and profit.
Make Better Decisions on Customer Acquisition Costs
When you know what you will earn from a typical customer, you can increase or decrease spending to ensure you maximize profitability and continue to attract the right types of customers.
Improve Forecasting
CLV forecasts help you make forward-looking decisions around inventory, staffing, production capacity, and other costs. Without a forecast, you could unknowingly overspend and waste money or underspend and struggle to keep up with demand.
Reduce Churn Rates
Businesses that spot early warning signs of churn—including declining purchase frequency or decreasing average order values—can implement targeted retention strategies.
Advantages of Customer Lifetime Value
When companies use CLV effectively, they can make more informed decisions about where to focus their resources and how to grow customer relationships. Here are four core advantages of tracking CLV and how to achieve them.
Improve customer retention:
One of the biggest reasons to track CLV is to improve customer retention and avoid customer attrition. Tracking these details with accurate segmentation can help you identify your best customers and determine what’s working well.
Drive repeat sales:
Some retailers, tech companies, restaurant chains, and other businesses have loyal customers who return again and again. You can use CLV to track their average number of visits per year or over the customer lifetime and use that data to strategize ways to increase repeat business.
Encourage higher-value sales:
Companies can increase the value of high-CLV customers by cross-selling and upselling them on additional and premium products and services.
Increase profitability:
Overall, a higher CLV should lead to bigger profits, all else being equal. By keeping customers longer and building a business that encourages them to spend more, you should see the benefits show up on your bottom line.
Challenges of Customer Lifetime Value
Using CLV effectively comes with the following two main challenges.
It can be hard to measure:
If you don’t have quality tracking systems in place, calculating CLV can be difficult. An enterprise resource planning (ERP) or customer relationship management (CRM) system can make this information easily available on an automated dashboard that tracks KPIs.
High-level results may be misleading:
Looking at a business’s total CLV can be a helpful data point, but it can also cover up problems in certain customer segments. Breaking down the data by customer size, location, and other segments may provide more useful data.
How to Measure Customer Lifetime Value
Businesses with ERP systems don’t have to worry about the math behind CLV. The system does all of the calculations for you. If you’re looking to measure CLV manually, however, follow the steps and formula below.
4 Steps to Measure Customer Lifetime Value
Determine Your Average Order Value
Start by finding the value of the average sale. If you haven’t been tracking this data for long, consider looking at a one- or three-month period as a proxy for the full year.
Calculate the Average Number of Transactions Per Period
Do customers come in several times a week, which might be common with a coffee shop, or only once every few years, which could be the case at a car dealership? The frequency of visits is a major driver of CLV.
Measure Your Customer Retention
Figure out how long the average customer sticks with your brand. Some brands, like technology and car brands, can inspire lifelong loyalty. Others, like gas stations and retail chains, may have much less loyal customers.
Calculate Customer Lifetime Value
Now you have the inputs. It's time to multiply the three numbers together to calculate CLV per the formula below.
Customer Lifetime Value Formula
Here is the formula for calculating CLV.
CLV = Average transaction size x Number of transactions x Retention period
Each of these inputs acts as a lever you can pull to grow your CLV. However, every move your business makes may have unintended consequences that affect CLV. Experienced marketers familiar with the four Ps of marketing—product, place, price, and promotion—have a strong understanding of how marketing efforts directly influence CLV.
Important Considerations for CLV Calculations
It’s important to account for more than the gross revenue that customers are pulling in. By incorporating the four Ps mentioned above, businesses can derive more nuanced and actionable insights into how to improve their CLV and foster stronger, longer-lasting customer relationships.
- Product: High-quality, innovative, and subscription-based products typically lead to longer customer retention and higher transaction values compared with commodity products.
- Place: Where and how customers access your offerings—online, in-store, or through third-party platforms—affects transaction frequency and costs. For example, ecommerce may increase sales volume but introduce additional logistics expenses.
- Price: Price increases can boost transaction size, but they may also push customers toward competitors or reduce their purchase frequency. Businesses must find the right balance between profitability and customer loyalty.
- Promotion: Discounts, loyalty programs, and marketing campaigns can boost CLV by driving repeat purchases and attracting high-value customers. But overusing promotions and targeting them poorly can erode margins.
Customer Lifetime Value Examples
Here are scenarios from three very different industries to demonstrate how CLV can affect your company.
Coffee Shop
Let’s say a local coffee chain with three locations has an average sale of $4. The typical customer is a local worker who visits two times per week, 50 weeks per year, over an average of five years.
CLV = $4 (average sale) x 100 (annual visits) x 5 (years) = $2,000
Car Dealership
A car dealership has a much higher average sale amount with a lower purchase volume. In this example, we’ll assume the average customer buys a new car every five years for $30,000. Customers are loyal to this brand and keep buying from it, on average, for 15 years.
CLV = $30,000 (average sale) x 0.2 (annual purchases) x 15 (years) = $90,000
Video Streaming Service
Let’s assume an online video streaming service has multiple price plans, but the average customer spends $17 per month. Customers typically subscribe for three-and-a-half years and use automatic monthly payments.
CLV = $17 (average sale) x 12 (annual purchases) x 3.5 (years) = $714
14 Ways to Improve CLV
Here are 14 ideas to consider if you’re trying to generate more revenue from the typical customer.
Introduce Customer Loyalty or Rewards Programs
Customer loyalty programs keep customers engaged and reward frequent purchases. Airline frequent flyer programs and restaurant punch cards are popular examples. Incentivizing customers to return can increase purchase frequency.
Enhance the Customer Experience
Your website, storefront, call center, and other touchpoints are all part of the customer experience. If customers enjoy a smooth, low-stress shopping experience every time, they’re more likely to return.
Improve Customer Onboarding
Some customers buy a product or service from a business and don’t know what to do next. Successful businesses chart a path for their customer relationships over time.
Stay Engaged with Customers
Businesses that actively monitor all interactions with customers can identify ways to improve the customer experience and boost loyalty. This engagement should span advertising, customer support, sales, and other channels.
Improve Customer Service
Bad customer service is a quick path to a falling CLV as customers leave for competitors. Focusing on making every customer service interaction a positive one will further enhance customer loyalty. Dedicated customer service applications can bring these interactions to one central platform for streamlined management.
Focus on Customer Relationship Management
Businesses need to understand their relationships and communication history with customers across sales, customer service and marketing. ERP and CRM systems can help track and enhance these relationships over time by creating a seamless flow of information across the entire customer lifecycle, from lead through opportunity, sales order, fulfillment, renewal, upsell, and support.
Create a Customer Feedback Loop
If a customer does have a bad experience, it shouldn’t go unresolved. Businesses should continuously solicit customer feedback to enhance the customer experience.
Invest in Software and Other Technologies
Different technologies can automate processes and track and centralize much of your business data. Some companies rely on basic tools such as email, spreadsheets, and contact databases to manage all this information, but proven, packaged applications suites are more effective at handling these functions. Your customers will notice the difference.
Upsell and Cross-Sell
It's easier to reengage or upsell an existing customer than bring in a new one. Upsell and cross-sell strategies are designed to encourage customers to buy more expensive or multiple products or services at once.
Increase Prices
When done deftly, price increases increase CLV directly. Just take care to avoid scaring off customers with dramatic increases. Also, consider competitor pricing when determining your own.
Take Advantage of Social Media
One of the best places to get your customers' attention is to reach them in places where they already spend time. Social media platforms such as Facebook, Instagram, X, and TikTok are channels to both advertise to and interact with customers.
Create Simple Purchasing Experiences
A poorly designed ecommerce site or physical store layout, poor signage and shelf labeling at stores, and long lines at checkout are among the many factors that can cause customers to move on before buying anything. Building a simple purchase experience will help you capture every possible sale. A/B testing can help businesses find out what works best.
Make Returns Easy
Making product returns and exchanges difficult can cost you a customer for good. A painless returns process makes it more likely a customer will come back and give your products or services another try.
Target Content
All customers aren’t the same. Increase sales and build brand trust and loyalty by targeting your marketing content—whether it’s email promotions, social and blog posts, ebooks, videos, or podcasts—to specific segments of your customer base,
Track, Measure, and Improve Customer Lifetime Value with NetSuite
Business software suites like NetSuite have sophisticated analytics capabilities that can provide various value calculations, removing the need to cobble together metrics in a spreadsheet. NetSuite provides dashboards and tools to calculate CLV instantly, including the option to slice up the data by segment.
In addition, NetSuite offers CRM and ecommerce systems that can track all the data needed for multichannel businesses to calculate CLV and understand how it changes over time. These systems are all part of a unified platform that presents a central source of information for the entire organization without the need for third-party integrations. That makes it much easier to find the KPIs that help you understand the performance of your business.
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Customer Lifetime Value (CLV) Frequently Asked Questions
What is meant by customer lifetime value?
Customer lifetime value (CLV) refers to the revenue a business generates from the average customer over the course of their relationship.
How is CLV different from other customer metrics? Unlike single-focus metrics, such as customer acquisition cost, average order value, and net promoter score, customer lifetime value (CLV) combines purchase frequency, order value, and customer lifespan to provide a comprehensive view of a customer’s total financial impact over time.
What is customer lifetime value (with an example)?
Customer lifetime value (CLV) represents the total revenue a customer will generate for a business throughout the relationship.
How do you calculate the lifetime value of a customer?
To calculate customer lifetime value, multiply the average revenue per visit by the number of visits per year, then multiply by the average number of years for the typical customer relationship. The formula for CLV is:
CLV = Average transaction size x Number of transactions x Retention period
