Customer lifetime value (CLV), often referred to as CLTV or LTV, is one of the most important business metrics for a company. CLV is a popular metric because it’s directly tied to revenue. By measuring CLV in relation to customer acquisition costs (CAC) and customer retention, companies can better prioritize their focus and funds. As a revenue metric and statistic, CLV can be employed to understand both historical customer behavior and help forecast future customer behavior.
Simply calculating and knowing CLV isn’t enough though. To get the most out of CLV metrics, businesses must improve their customer experience (CX) strategies. Our guide below gives insights into how CX relates to customer lifetime value and offers key CX tactics that companies can execute to increase their CLV and their bottom line. To quickly compute either an individual customer’s CLV or average CLV, jump to our easy-to-use customer lifetime value calculators now.
What is Customer Lifetime Value
Customer lifetime value (CLV) represents the total amount of money a customer will bring to a company throughout the business relationship.
CLV can help determine the amount of money and effort that should be invested in acquiring new clients versus working towards retaining existing ones. A business typically profits more from existing customers than hustling to acquire new ones. According to Marketing Metrics, the probability of converting a new customer is 5–20%. This is a much lower conversion rate compared to converting an existing prospect, who converts 60–70% of the time.
The longer a customer pays for a company’s services, the more significant their lifetime value becomes. A company’s CX team directly affects CLV and profit due to their impact on the customer journeyand ability to reduce a businesses’ churn rate . Before further examining how CX can improve CLV , let’s discuss how to properly calculate CLV.
Individual Customer Lifetime Value Calculator
Ideally, a company wants to be able to calculate both their average CLV and individual customer’s CLV. Below, we will discuss how to calculate an individual customer’s lifetime value to help businesses determine which customers matter the most.
To calculate individual CLV a corporation needs to know how much customers purchase, how often, and their general overhead costs.
Individual Customer Lifetime Value Formula
The customer lifetime value formula is fairly simple. To better understand the formula, we’ll need to define its components first.
Let’s put these newly-defined terms together in the individual CLV formula:
Here is an example of how to calculate an individual customer’s lifetime value that regularly pays for a product or service.
- The customer pays $50 for a product (purchase value = $50).
- The customer makes the $50 payment four times a year (purchase frequency = 4x annually).
- For the past 3 years, the customer has consistently paid for a product (average customer duration = 3 years).
- $50 x 4 x 3 = $600 (Individual Customer Lifetime Value).