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HomeMarket researchA guide to calculating and improving your customer lifetime value (CLV)

A guide to calculating and improving your customer lifetime value (CLV)

Last updated

2 April 2023

Reviewed by

Hugh Good

How well do you know your customers' spending habits? 

If you don’t have a clear answer to this question, your brand will likely leave a large amount of money on the table and incur more risk. 

As many successful and philosophical entrepreneurs often claim, business truly is just a numbers game. 

Generally speaking, your brand needs the cost of customer acquisition to be less than the revenue earned per customer. Otherwise, you likely aren’t making much profit, and long-term growth and success can feel nearly impossible.

But there is something you can do to prevent this fate.

Your business needs to conduct research to measure your customer lifetime value (CLV) to gain an understanding of your customers and their spending habits.

CLV is an essential metric that provides insights into the average revenue earned per customer. It’s a helpful reference point that you can use to ensure your brand is making the right choices to produce net growth over time.

But how can you calculate and improve your company’s customer lifetime value? This guide covers everything you need to know. Let’s get into it!

What is customer lifetime value (CLV)?

Customer lifetime value measures the total revenue your company can expect to earn from the average customer throughout the time they are a client of your business.

Calculating your CLV involves understanding two metrics: The average amount of revenue per customer and the total average profit. The latter is the amount your company actually earns per customer once you’ve factored in operation, acquisition, and other costs. 

Generally, successful businesses want to grow their revenue, so you should aim for your total average profit to be a positive, ideally high-value number.

Note: Calculating your customer lifetime value may be complex if you work for a large, omnichannel company. 

Your team may find it helpful to calculate different CLV metrics for different areas of your business depending on:

  • Your company’s business model 

  • The types of products and services you offer

  • The categories of customers you work with

Why customer lifetime value is important to your business

Your business needs a strong baseline understanding of your income and revenue for sustainable growth. Calculating your CLV means your team can use the metric to:

Make better decisions with your valuable resources

Do you spend too much money on fruitless marketing strategies? 

How much money can your business expect to earn per new customer? 

Knowing your CLV will help your company understand your efforts' return on investment (ROI), saving you valuable resources, time, and stress.

Get a glance into the future

Understanding your baseline CLV can improve your company’s ability to forecast future growth. 

Your customer lifetime value can help your team decide on many factors, like future inventory, product costs, and staffing requirements, reducing overspending and waste. 

Improve customer retention and increase sales

Knowing your CLV brings a better understanding of your customers' average time with your brand. With this information, your company can integrate customer retention strategies to increase revenue from clients already in your brand ecosystem. 

This is a helpful way to boost profit without increasing marketing and outreach efforts.

Avoid potentially costly mistakes

Because we’re passionate advocates for the companies we work for, it’s tricky to have an unbiased view of how our company is doing. 

By assessing your CLV, your team can take a more logical approach to product launches. This reduces your risk of making costly mistakes that could impact profits and customer satisfaction. 

Hold onto high-value clients

Does your company offer higher-value services or products to a smaller section of your target market? If so, getting a better understanding of your CLV can guide decisions to improve customer experience, which can:

  • Increase the likelihood of customer repurchases

  • Improve their experience with your business

  • Enhance brand loyalty

The customer lifetime value formula

To learn your company’s CLV, you need to calculate three separate metrics: 

  • Your average purchase value

  • Your average customer lifespan

  • Your average purchase frequency

Average purchase value

Your average purchase value (APV) represents the revenue your company earned per purchase. 

You can calculate this by dividing the total income your team earned during a set period by the number of individual purchases made during that timeframe:

AVP = Total Revenue Earned / Total # of Purchases

Average customer lifespan

Your average customer lifespan (ACL) refers to the average time your customers spend engaged with your brand. 

To calculate this value, divide the sum of your customer lifespans by the total number of customers during a set period:

ACL = Sum of Customer Lifespans / Total # of Customers

Average purchase frequency

Your average purchase frequency (APF) shows the average number of individual purchases within a specific period. 

You can calculate it by dividing the number of purchases by the number of unique customers:

APF = # of purchases / # of unique customers

Calculating your customer lifetime value

Once you have calculated the needed values for your CLV, you simply plug your metrics into the customer lifetime value formula to get your results:

CLV = Average Purchase Value x Average Customer Lifespan x Average Purchase Frequency

Depending on the size, history, and amount of customer research you have access to, your CLV will vary in accuracy. 

For best practice, we advise regularly calculating your CLV, especially as your company grows and changes. 

Generally speaking, as your brand becomes more successful, you should see an increase in your customer lifetime value over time.

Customer lifetime value models

You can choose from two different CLV models:

Historical customer lifetime value

As the name implies, calculating your historical customer lifetime value involves using your business’s gross profit from all historical purchases. 

You can calculate your historical CLV for individual customers or as a more generalized cohort analysis.

Your historical CLV should consider the costs of the following: 

  • Acquisition

  • Marketing

  • Operational factors

  • Any other costs 

This gives you the most accurate understanding of profit per customer. 

Unfortunately, the historical CLV method often involves lumping large groups of customers together, even when they have different spending behaviors. Because of this, many people opt for the predictive CLV model for increased accuracy.

Predictive customer lifetime value

Alternatively, you can calculate customer lifetime value by using the predictive model. 

Based on predictive analysis, this method accounts for past sales and revenue and current customer spending behaviors to forecast future spending and revenue.

As your company continues to grow and sell, your predictive CLV metric will become more and more accurate as you add new purchases and insights to the database.

Predictive CLV is the most common model for understanding your customer’s lifetime value, as you can personalize it to your unique business model. 

Saying that, no predictive CLV metric is 100% accurate—they are forecasts, not definitive truths. 

7 ways to improve your customer lifetime value

Now you know how to calculate your CLV, what do you do if the number needs a little boost?

As a fluid and dynamic metric, your company can improve its customer lifetime value and increase revenue. 

Here are a few of our top tips for improving your CLV without spending a bunch of money, time, and resources. You can even start as soon as today!

Create a seamless onboarding experience

Welcoming new customers to your products or services is essential for keeping them engaged with your brand. 

To encourage involvement with your offerings, take some time to assess and adjust your current onboarding experience:

  • Do your new customers have all of the information they need? 

  • Is there a way to improve this experience and brand loyalty? 

A thoughtful, detailed onboarding process will create more long-term, happy customers while increasing your CLV.

Make a loyalty program

Customers love rewards for repeat purchases. They’re an easy way to improve customer satisfaction, encourage repurchasing behaviors, and boost your CLV.

Some of the most effective loyalty program systems include:

  • Buy nine, get one FREE reward cards

  • Point systems that work towards future discounts

  • Exclusive deals for repeat customers

  • Early access to new products and services 

Recognize your top customers

Calculating your customer lifetime value gives you the time to identify your top customers. They’re loyal to your brand and frequently make additional purchases.

It’s important to recognize and reward their loyalty with perks. Whether you offer exclusive deals, early access, or entry into an elite group or community, this is a great way to increase the time these customers spend with your brand.

Provide multi-channel support

Confusion and frustration with your product or service can stop your customer from using your offerings. 

While many companies offer customer service through their website or phone, expanding how people can contact you for assistance is a great way to mitigate negative experiences. 

You can offer everything from online chatbot support to social media that encourages customer comments and complaints. This can improve customer experience, boosting your CLV.

Engage customers on social media

Is your brand getting the most out of its social media presence?

As one of the most effective and affordable marketing tools, companies of all sizes use social media to develop more personal connections with their customers. 

While this may take some time to build up, a well-established social media presence can help new customers find your brand. It can also make existing customers feel more involved in your mission and offerings.

Nurture your unhappy customers

Every brand has to deal with customers who are unsatisfied with their purchases. 

Yes, it’s incredibly tempting to focus your energy on the majority of customers who have a good experience with your brand. However, you can improve your CLV metric by nurturing and supporting unhappy customers who are more likely to disengage with your business.

Whenever possible, offering compassionate customer service, learning about their pain points, and offering support are three great ways to reduce the number of unhappy customers. A proactive approach may prevent them from abandoning your business and never repurchasing.

Invest in customer research

The best way to improve your CLV is to go all in on customer research. This can also enhance every other area of your business.

Companies that listen to their customers’ feedback and direction are more likely to build brand loyalty and experience higher customer satisfaction. 

Happy customers are more likely to engage with your brand, which elevates your CLV and encourages sustainable business growth over time.

If your team is new to UX research, we recommend starting with customer insight software that helps you put your customers first. Dovetail offers an excellent, all-round solution. 

With this guide, your team is ready to calculate, understand, and improve your current CLV.

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Contents
  • What is customer lifetime value (CLV)?
  • Why customer lifetime value is important to your business
  • Customer lifetime value models
  • 7 ways to improve your customer lifetime value

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