Customer lifetime value (CLV) represents the total

revenue a business can expect to earn from a customer

throughout their relationship. In this guide, you’ll learn
how to calculate CLV and strategies to improve the same.
Customer lifetime value, also known as CLV or CLTV is the secret
to unlocking consistent revenue and growth while
driving customer retention and loyalty. Understanding the
customer lifetime value formula enables you to turn your one-
time buyers into lifelong customers without constantly chasing
new leads.

What is Customer Lifetime Value (CLV)?

Customer lifetime value (CLV) is the total anticipated
revenue a company foresees from its average customer
throughout their entire relationship. It is an estimate of the total
value a customer brings to a business.
This metric doesn’t focus on the value of a single transaction.
Instead, it considers all the potential transactions that can be
made with the customer. Customer lifetime value means
considering factors such as customer acquisition costs (CAC),
ongoing sales and marketing expenses, operational costs, and
production expenses.
Many businesses focus solely on immediate sales—a myopic
approach that neglects the potential long-term customer value.
While acquiring new customers is necessary for expansion,
nurturing existing relationships and maximizing the consumer
lifetime value is equally—if not more—important for maintaining a
thriving business model.
There are two main types of CLV models.
Historic CLV Models
Also known as traditional customer lifetime value analysis, the
historic lifetime value model focuses on past customer
behavior to calculate the value already generated. This approach
uses actual transactional data and is particularly useful for
evaluating existing customer relationships.
Predictive CLV Models
Predictive CLV models conduct lifetime value analysis to
forecast future customer value. This type of CLV analysis uses
statistical techniques and machine learning algorithms to
estimate potential future revenue based on various factors such
as purchase history (historical data), customer
demographics, customer engagement metrics, average purchase
frequency rate, business overheads, and so on.
The key difference between historic and predictive CLV lies in
their temporal focus and application.
 Historic CLTV provides a retrospective view, while predictive
CLV offers forward-looking insights.
 Businesses use historic CLTV for performance evaluation
and customer segmentation, whereas predictive CLTV guides
future marketing investments and customer acquisition
strategies.
Both types of customer lifetime value analysis are valuable for
different purposes.
A comprehensive customer life time value analysis often
combines both approaches to gain a holistic view of long term
customer value. This integrated approach allows businesses to
not only understand past performance but also make data-driven
decisions for future growth and customer retention strategies.

How to Calculate Customer Lifetime Value

Customer lifetime value calculation relies on informed
assumptions, such as estimating average sale value, transaction
frequency, and customer relationship duration. Established
businesses with historical data can calculate CLV more accurately.
CLV Formula
The customer lifetime value formula is:
CLV = (Average Value of Sale) × (Average Number of
Transactions) × (Average Customer Lifespan)
Average purchase value multiplied by average purchase
frequency is your “customer value.” So, in essence, the CLV
formula is:
CLV = Customer Value × Average Customer Lifespan
.
Customer Lifetime Value Example
To give you a concrete CLV example, let’s create a hypothetical
company for calculating customer lifetime value.
The average sale for the boutique clothing retailer, Bellissi, is $50,
and the average customer shops with them three times per year
for two years. The customer lifetime value of this customer is
calculated as follows:
Customer Value = Average Value of Sale × Average Number of
Transactions
= $50 × 3
= $150
Customer Lifetime Value = Customer Value × Average Customer
Lifespan
= $150 x 2
= $300
This basic CLV calculation provides a quick estimate but doesn’t
account for factors like customer acquisition costs or the time
value of money.

Customer Lifetime Value Calculation Considering

Important Business Factors
In companies with complex products and business models, the
formula for calculating lifetime value of a customer gets
complicated. Several factors contribute to the customer LTV
formula such as churn rate and brand loyalty. Let’s take a
look at these factors in detail.
Churn Rate
The rate of attrition, or churn rate, differs from business to
business, depending on the competitive advantage a business
can command. For subscription-based businesses, such as SaaS
companies, the customer lifetime value calculation often includes
churn rate.
Churn rate is calculated by:
 Subtracting customers at the end of the period from
customers at the beginning of the period.
 Dividing the difference by the number of customers at the
beginning of the period.
Churn Rate = (Users at the Beginning of the Period – Users at the
End of the Period) x 100 / Users at the Beginning of the Period
Consider this example: if a business started the year with 1,000
loyal customers and ended the year with 750 customers, their
churn rate would equal 25%. This means 25% of their customers
took their business somewhere else.
Want to reduce churn for your business?
Customer Loyalty
We must also consider how a customer perceives the brand in
question. If a customer has no dedication to a particular brand,
they are considered brand-agnostic. Building a sense of brand
loyalty is important for any business as it directly correlates to an
increase in customer retention rate and a decrease in churn rate,
which in turn, helps increase CLTV.
Loyal customers will advocate on the company’s behalf. As
champions of the brand, they will drive word-of-mouth marketing.
Brands with loyal customers are likely to see a higher than normal
client lifetime value.
Why is Customer Lifetime Value Important to Your
Business?
Understanding consumer lifetime value is essential for businesses
across all sectors. Let us deep dive into the reasons and see some
examples of customer lifetime value in marketing and SaaS.
1. Informs Customer Acquisition Strategies
CLV helps businesses determine how much they can afford to
spend on acquiring new customers while remaining
profitable. This is especially important in the SaaS industry, where
customer acquisition costs (CAC) can be high. Lifetime value
calculation helps inform their marketing budget and strategies,
allowing them to optimize their customer acquisition efforts.
2. Drives Customer Retention Efforts
Understanding CLV helps businesses recognize the importance of
customer retention. It’s often more cost-effective to retain
existing customers than to acquire new ones, and CLV
quantifies this value.
Consider CLV in this marketing example: A content marketing firm
uses CLV to demonstrate the value of their services to clients.
They show how their strategies increase the CLV of their clients’
customers, illustrating the value of their services in helping them
improve client lifetime value, hence justifying their fees.
3. Guides Product Development and Business Growth
CLV provides valuable insights that can inform product
development strategies and overall business growth plans. By
understanding which customers can generate the most
value over time, companies can tailor their offerings to attract
and retain these high-value customers.
Understanding and improving client lifetime value can drive
acquisition strategies, enhance retention efforts, and guide
overall business growth. By focusing on increasing CLV,
businesses can ensure long-term profitability and success.
Tips to Improve Customer Lifetime Value
To increase customer lifetime value, it is important for companies
to uplift their customer experience strategy as well as ensure an
effective defense against competitor disruption. Businesses that
use economies of scale, for example, can attain a much lower
price point than the competition.
Most companies, however, do not have this luxury. This means
they must implement tactics to improve operational
efficiencies and impress customers through targeted,
personalized, and relevant communication.
1. Optimize Onboarding
To improve customer lifetime value, it is important to reduce
the churn rate. High churn rates after a single interaction
underscore the urgent need for companies to make their first
impression positive. Customers often need education on the
features and benefits of your product to truly understand how the
product can positively impact their lives.
In a service business, effective user onboarding can be as simple
as demonstrating a dedication to customer service and
availability to solve customer problems. Being attentive to the
needs of a first-time customer and relieving any hesitations about
their decision to purchase should be a top priority for this first
interaction.
2. Effective Communication
Keeping an open line of communication with the customer
goes a long way in improving customer LTV. In today’s
environment, it’s more important than ever to respond to
feedback, especially negative comments and poor ratings.
The simple acknowledgment that a company is receptive to
feedback and dedicated to addressing customer problems can be
a catalyst for repeat business. Increasing the effectiveness of
customer communication also applies to sales and marketing
copy. You can measure the performance of communication with
customers by assessing churn rate and ad conversion rate.
3. Implement Loyalty Program
Implementing a customer loyalty program can be a great way
to personalize the customer experience while incentivizing
repeat purchases. Some common loyalty programs offer reward
points, or the ability to unlock free and discounted products after
the accumulation of purchases.
Customers are proud of the rewards they accrue and companies
are rewarded with an increase in client lifetime value. An airline,
for example, rewards customers who make purchases using their
exclusive credit card with free miles that can contribute to the
cost of a flight or accrue to a free flight.
4. Retarget Customers
One of the most important tactics to increase customer lifetime
value is to re-engage customers who have had a previous
experience with the brand. Retargeting can be a simple reminder
of the company and, at the very least, increase brand recognition.