What is Customer Lifetime Value?

Customer lifetime value (CLV) is one of the most important factors in determining your business’s present and future success. It’s an often-overlooked metric that accurately predicts how valuable customers are. 

By measuring the net profit you’ll take in throughout your entire relationship with a customer, you can narrow down exactly how valuable they are to your business.

The Formula for CLV:

Why is calculating customer lifetime value important?

Customer lifetime value (CLV) helps you determine how much to invest in acquiring customers by estimating the long-term value they will bring to your business. Rather than merely surviving, CLV enables you to pinpoint which customers deserve more attention and, crucially, understand why they’re worth focusing on.

CLV offers a clear picture of the benefits tied to acquiring and retaining specific customers—recognizing that not all customers provide equal value.

Drives repeat business and revenue

By identifying high-value customers, you can see which products they prefer and understand what improves their lives. CLV helps boost satisfaction and customer retention, increasing overall sales.

Improves LTV to CAC ratio

Research shows customer acquisition costs range from $127 to $462, depending on the industry. A good LTV/CAC ratio is 3:1, which indicates efficient sales and marketing efforts. Boosting CLV helps you assess how marketing impacts long-term profitability.

Strengthens customer loyalty

Strategies to raise CLV also enhance customer support, products, pricing, referrals, and loyalty programs, ultimately improving the customer experience. Loyal customers tend to buy more frequently and spend more than new ones.

How to calculate the lifetime value of a customer?

1. Segment Customers Using RFM

Group customers by recency, frequency, and monetary value to identify high-value segments. Before diving into customer lifetime value (CLV), it’s important to understand the key elements of customer value analysis: recency, frequency, and monetary value (RFM). Learn more. 

2. Calculate the Average Order Value 

The average order value (AOV) indicates how much a customer typically spends per transaction. To calculate it, simply divide your total revenue by the total number of orders. For store owners, this information is accessible in the Dashboard section of GoProfit: Profit Analytics app (as the screenshot below).

3. Figure out the average purchase frequency

Purchase frequency refers to the average number of orders made by each customer. To calculate this, use the same period as your average order value calculation, and divide the total number of orders by the total number of unique customers. This will give you the purchase frequency. 

4. Calculate customer value

Customer value refers to the average amount of revenue each customer contributes to your business over a specific period. To determine customer value, simply multiply the average order amount by the frequency of purchases.

5. Multiply customer value by average lifetime value

Once you’ve determined the customer value for each segment of your audience, calculating CLV is as simple as multiplying that value by the average customer lifespan. The average customer lifespan represents the typical duration of your relationship with a customer before they become inactive and stop purchasing. It’s important to distinguish between contractual and non-contractual businesses when considering customer lifespan.

Most online stores are non-contractual, meaning the transaction ends once a purchase is made. The challenge with these businesses is identifying when an active customer (one who makes purchases and will continue doing so) becomes inactive (someone who won’t make any future purchases). In contrast, some online stores, like subscription-based businesses, operate on a contractual model. Here, it’s easier to determine when a customer becomes inactive, as they typically announce it when they cancel their contract or subscription. This makes identifying the average customer lifespan much simpler. If your store is new or has only been operating for a few years, you might lack sufficient data to calculate an average customer lifespan. However, there are quick workarounds to help you derive actionable insights from your CLV calculations.

Putting your CLV to work

Lower acquisition costs.

Use CLV to reduce your cost per acquisition (CPA) by dividing your marketing budget by new customers.

Maximize ROI

Subtract CPA from CLV to identify net profit per customer and focus on improving ROI.

Set ads budgets

CLV guides how much to spend on paid ads (Google, Facebook, TikTok,…).

Calculate max bids

With CLV and conversion rates, determine the max bid for campaigns (e.g., CLV $100, conversion 10%, max bid $10).

Upselling

High CLV customers are ideal for personalized upselling based on their purchase history and behavior.

FAQ

What is the formula for customer lifetime value (CLTV)?

Customer lifetime value (CLTV) represents the total value a customer brings to a business throughout their relationship.

How do you calculate customer lifetime in years?

Customer lifetime in years is found by averaging the duration between the first purchase and the end of the relationship for all customers. This calculation requires transaction data and churn rate analysis to measure when customers stop buying.

What’s the difference between customer lifetime value and customer lifetime?

Customer lifetime value is the total revenue or profit a business expects to earn from a customer throughout the relationship. Customer lifetime refers to how long that relationship lasts, usually measured in years or as the average time a customer continues purchasing from the business.