What is Customer Lifetime Value?

What is a Customer’s Lifetime Value?

A customer’s lifetime value, or LTV, is the measurement of how much a customer is worth to a
business over their entire tenure with that business. LTV does not measure just what the
customer will spend in a single transaction, but rather what they will continue to spend with a
business until they no longer buy anything from the company.
For example, a customer that spends $300 in a single transaction which might appear to be more
valuable than a customer who spends $100 in a single transaction. However, if that $100
customer comes back to your business ten times to make future purchases, they have an LTV of
$1000, which is more than if the customer who spent $300 never returns.

How to Calculate a Customer’s Lifetime Value

In order to customer lifetime value of a customer, you need to know three key things:
 How much a customer spends in an average purchase with your business
 How often the customer makes those purchases
 The average length of time a customer will remain being a customer of your
business

LTV Formula

The formula looks like this:

Note: The above formula is based on a yearly period of time, but could also be calculated on any
amount of time. So we might compute LTV based on purchases per week and lifetime in weeks,
purchases per day and lifetime in days, etc.
Lets step through calculating each piece and then return to and example of the formula.

Average Purchase Amount

Do people always make the same sized purchase when buying from your business? Most likely
they do not, but in order to calculate any summary statistic we need to compress the variability of
the distribution into a single representative number. When we have data on past customers we
can perform an average across all transactions. To get a more sensitive view we can timebox this
average to be for purchases within the past year or month. This can also be broken out by cohort
if the purchase amount changes significantly over time or between demographics.

Average Number of Purchases

Here again we face the same problem as before – will be people be consistent in their purchasing
behavior? Almost certainly not, but we need to make an assumption that it is in order to have a
high level view of what is going on. We can timebox this average or use cohorts to tune this
number to be more relevant.

Time With Company

There are multiple ways to measure how long a user stays with you. If your company has been
around a long time and many customers have established histories of starting and ending their
purchases with you, then you can use the average amount of time it took for that to happen for
your LTV. Often times it is necessary to create a time window to establish that a customer has
stopped buying from you. For instance, you could set a 3 month window that if they have not
made a purchase in the past 3 months they are considered churned.
This computation gets much more complicated when you have many customers who currently
exceed this average lifespan and are continuing to purchase from your business. How do we
predict the length of time these customers will buy from our business? There are several
strategies that involve statistical modeling but we will not delve into those. Instead we propose a
simple model using the Lindy effect to make an estimate. We discuss this further in the proxy
metrics section since it is not an exact formula.

Example LTV Calculation

Customer A spends $125 in an average purchase. Generally, Customer A averages a purchase

every six months, and will have an average lifespan of 3 years with your company. Customer A’s
lifetime value to your company, then, is $750.

Customer B, on the other hand, spends an average of $75 every 3 months, and will have an
average lifespan of 10 years with your company. By contrast, Customer B’s lifetime value to
your company is $3,000.

You can use this formula to calculate the lifetime value of all customers, segments of customers,
or even individuals. We will discuss how to use proxy metrics to determine the different parts of
the formula if the data isn’t available at the end.

Visualizing Lifetime Value

There are many different ways to visualize customer lifetime value, and your choice will depend
on the specific aspects of your LTV that you want to emphasize. Let’s explore the most common
and most effective ways to visualize LTV:
 Single value charts can clearly summarize LTV. You could also use these
to show LTV of different customer segments or different parts of the LTV
equation.
 Line charts can display LTV over time to expose overall trends using
moving averages. However, a line chart does not capture which part of the
equation may be changing.
  Bar charts can help you compare the LTV of different categories of
customers.

Effectively Using Lifetime Value to Drive Business Decisions

Customers’ lifetime value gives you an upper limit on how much you can spend acquiring and
servicing a customer. Keeping an eye on how LTV changes can help you optimize your business.
Let’s dig in deeper to the business implications of LTV.
How Much Can You Afford to Spend on Advertising?

If you discover that the average customer’s lifetime value to your company is only $250, you
don’t want to spend more than that to attract them to your business in the first place. A LTV to
Customer Acquisition (CAC) ratio of 3:1 is considered good in most cases. As LTV grows, the
amount you can spend to attract a new customer also increases.

What Is Your Customer Service Worth?

When it comes to spending money on your customers, it doesn’t stop when you bring them in the
door: you also need to retain them. Efforts to keep customers can include retargeting campaigns,
emails, and even your customer service. These are additional costs to keep in mind that need to
be below the customer’s LTV.

What Buyer Persona Represents Your Best Customers?

When you calculate the lifetime value of your customers, don’t look at the customer base as a
whole. Instead, break down your customers into different segments. Then evaluate these
segments to see if their LTVs are different. Are some routinely spending more or staying with
your business longer than another segment? If so, focus on marketing to that specific segment to
bring in more of these high-LTV customers in. Alternatively, you might shift your efforts so that
you can offer products more likely to appeal to buyers who are currently spending less at your
store, encouraging them to make bigger purchases in the future.

Acquire new customers or retain existing customers?

When LTV increases, there is more money to spend on acquiring and serving the customer
better. Acquiring new customers does not increase LTV, retaining customers for longer does. It
is also typically easier to retain existing customers since you have more opportunities to
convince them to stay without needing a paid channel for that communication. To acquire
customers it almost always takes more money to get in front of them.

Segmenting Lifetime Value

Customer lifetime value can tell you a great deal about the buying habits of your customers and
how much they’re worth. However, we need to dig in deeper to get more value out of it.

Segment Customers

It’s important to segment your customers to understand LTV more fully. Be sure to look at the
full distribution behind each segment. If you segment by a demographic without looking at the
underlying data you may discover it is not homogenous in their LTVs. As a result, if you de-
prioritize this segment you may lose some high value customers.
In addition, make sure that you continue to offer value to all of your customers. You never know
when a customer that you perceive as being part of a segment that has less value for your
business will have a connection to someone who has greater value or if they might become part
of a more valuable segment. Word of mouth is still very relevant and you do not want to treat
customers in anyway that would damage your brand.

Segment Equation

While overall LTV of a segment lets us know how much customers are worth we can evaluate
the parts of the equation to understand more about how they are interacting with our business. It
allows us to ask different questions to drive business decisions:
 Avg. Purchase Amount - Can we increase the money they spend each time?
 Frequency of Purchases - Can we increases the number of times they spend
with us?
 Time buying from Company - Can we keep them coming back for longer?

Proxy Metrics for Customer Lifetime Value

Are you struggling to get the numbers you need to measure the lifetime value of a customer with
your company? Do you not have enough data to be sure how long the average customer sticks
around? Consider:

The Lindy Effect

The lindy effect states that anything that has existed for an amount of time is likely to exist for
that same amount of time in the future. If you have had a customer for a year you are likely to
retain them for one more year. This is an easy way to predict how long your customers will
continue purchasing from your company. While it may not be completely accurate, you can use
this until you have real numbers about when customers stop purchasing.

Survey

You can ask customers about purchasing behavior at other complementary businesses. How
often do you change SaaS CRM providers? How often do you change project management tools?
While this is also not the most accurate it can give you an idea about how long it takes them to
re-evaluate the products/services they are buying.

The Bottom Line

Measuring customer lifetime value is a highly effective way to guide your future business
decisions. It helps you determine marketing spend, how much customer service you can provide,
and where there are opportunities to grow your business with existing customers. Keeping a
close eye on how LTV changes over time will help you make better decisions to grow your
business.
Customer lifetime value (CLV) is a business 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 customer lifetime value calculations
complex. However, with the right tools, you can find customer lifetime value in just a few clicks.
 With an understanding of CLV, you can make better-informed marketing and sales decisions,
among other benefits. This guide provides insights about customer lifetime value, how to
calculate this metric and more useful information about CLV that business owners and managers
should know.
What Is Customer Lifetime Value (CLV)?
Customer lifetime value (CLV) is a measure of the total 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 by quartile or
some other segmentation of customers. This can give greater insight into what’s working well
with high-value customers, so you can work to replicate that success across your entire customer
base.
Note: There are multiple definitions of CLV: Basic calculations that only look at revenue and
more complex equations that factor in gross margin and operational expenses like COGS,
shipping, and fulfillment. Marketing expenses can be included but are sometimes left out if they
are too variable. For the sake of simplicity, we’re using revenue throughout this article.
Key Takeaways
 Customer lifetime value (CLV) is a measure of the average customer’s revenue generated over
their entire relationship with a company.
 Comparing CLV to customer acquisition cost is a quick 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’s working well and
what isn’t working as well for your organization.
Customer Lifetime Value (CLV) Explained
Customer lifetime value 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.
 For example, 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.
Why Is Customer Lifetime Value Important to Businesses? Why Does It Matter?
In the example above, we figured out the average lifetime value of a customer for a grocery
store. But why do businesses care about CLV? Here are a few key reasons to track and use CLV:
 You Can’t Improve What You Don’t Measure: Once you start measuring customer lifetime
value 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 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.
 Improved 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 put yourself in a bind where you
struggle to keep up with demand.
Advantages of Customer Lifetime Value
 Improve Customer Retention: One of the biggest factors in addressing CLV is
improving customer retention and avoiding 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 customer bases that come back again and again. You can use CLV to track the 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: Netflix is an example of a business that improved CLV
through higher pricing but learned years ago that increasing costs too quickly may scare off long-
time customers. The right balance is key to success here.
 Increase Profitability: Overall, a higher CLV should lead to bigger profits. By keeping
customers longer and building a business that encourages them to spend more, you should see
the benefit show up on your bottom line.
Challenges of Customer Lifetime Value
 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 customer lifetime value manually,
however, you can follow the steps and formula below.
4 Steps to Measure Customer Lifetime Value
 1. Determine Your Average Order Value: Start by finding the value of the average sale.
If you have not been tracking this data for long, consider looking at a one- or three-month
period as a proxy for the full year.
2. 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.
3. Measure Your Customer Retention: Finally, you’ll need to figure out how long the
average customer sticks with your brand. Some brands, like technology and car brands,
inspire lifelong loyalty. Others, like gas stations or retail chains, may have much less
loyal customers.
4. 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 customer lifetime value:
 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 impact CLV. For example, a price
increase may improve your average transaction size, but it could push customers to shop less
often or look for lower-cost alternatives.
Experienced marketers familiar with the four Ps of marketing — product, place, price and
promotion — have a strong understanding of how marketing efforts directly influence customer
lifetime value.
Customer Lifetime Value Examples
The best way to understand CLV is through examples. Here are examples from three very
different industries to better demonstrate how customer lifetime value may impact your
company:
Coffee shop
A coffee shop is a perfect starting example for CLV, as it is easy to understand even if you don’t
have an extensive business background. 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 someone buys a new car every five years for $30,000. Customers are
loyal to this brand and tend to keep buying from it for 15 years.

CLV = $30,000 (average sale) x .2 (annual purchases) x 15 (years) = $90,000

Software as a Service (SaaS) subscription

For the last example, 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

There are many different strategies companies can adopt to boost their CLV. Here are 14 ideas to
consider if you’re trying to earn more revenue from the typical customer:
1. 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 and the amount of time
a customer buys from a brand.
2. 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
are more likely to return for repeat business.
3. 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.
Turning a one-time customer into a source of recurring revenue is essential for growth in
many industries.
4. Customer Engagement
Businesses that actively monitor all interactions between the company and their
customers can identify ways to improve the customer experience and customer loyalty.
This should span channels like advertising, customer support and sales.
5. Improved Customer Service
Bad customer service is a quick way to see your CLV quickly fall, as customers leave for
competitors. Focusing on making every customer service interaction a positive one will
 further enhance customer loyalty. CRM systems and dedicated customer service
platforms bring these interactions to one central location for streamlined management.
6. Customer Relationship Management
Businesses need to understand their relationships and communication history with
customers across sales, customer service and marketing. ERP and CRM systems help
track and enhance these relationships over time by creating a seamless flow of
information across the entire customer lifecycle — from lead all the way through
opportunity, sales order, fulfillment, renewal, upsell and support.
7. Customer Feedback Loop
If a customer does have a bad experience, it shouldn't go unresolved. In addition to
relying on customer service to fix the issue, businesses should continuously solicit
customer feedback to enhance the customer experience. Regular product or service
iterations and fixes can resolve problem areas, helping to improve customer satisfaction.
8. Invest in Technology & Software
Technology can automate processes and track and centralize much of your business data.
Some companies rely on basic tools like email, spreadsheets and contact databases to
manage all this information, but it’s much easier to use proven, packaged software suites
to handle these functions. Your customers will notice the difference.
9. Upsell and Cross-Sell
It's often easier to reengage or upsell an existing customer than bring in a new one.
Upselling and cross-selling are strategies designed to encourage customers to buy more
expensive or multiple products or services at once instead of a lower-cost option.
10. Increase Pricing
When done correctly, a price increase can directly increase CLV. Just take care to avoid
scaring off customers with dramatic price increases. Also, consider competitor pricing
when determining your own. By focusing on value and giving customers something they
can’t get elsewhere, you may be able to increase pricing without losing customers.
11. 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 like Facebook, Instagram, Twitter and
TikTok are meaningful channels to both advertise and interact with customers.
 12. Simple Purchasing Experiences
Cart abandonment rate is a metric used by online businesses to track how many
customers start shopping but leave before completing the checkout process. This can also
extend to in-person buying experiences where excessive options and packaging can turn
customers off. Building a simple purchase experience will help you capture every
possible sale. Forward-looking businesses use strategies like A/B testing to find out what
works best.
13. Make Returns Easy
When a customer isn’t happy with their product or service, making returns and exchanges
difficult may cost you a customer for good. A painless returns process makes it more
likely a customer will come back and give your product or service another try.
14. Targeted Content
Content marketing is a strategy used to educate or entertain your target customers,
usually designed to build up brand trust and loyalty. Blog posts, e-books videos, podcasts
and other media are popular forms of targeted content that can speak to particular
segments of your audience.
Free Product Tour
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 manually cobble together metrics with 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
multi-channel 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.
Customer lifetime value is too important for any organization to ignore. When you have the right
tools and spend time understanding and finding ways to boost CLV, your business should enjoy
increased growth and success as it moves forward.
Customer Lifetime Value (CLV) Frequently Asked Questions
What is meant by customer lifetime value?
Customer lifetime value refers to the entire amount a business earns from the average customer
over the course of their relationship with the business.
What is customer lifetime value with an example?
Customer lifetime value represents the total revenue a customer will generate for a business
throughout the relationship. For example, let's say a typical restaurant customer visits once per
month and spends $17 per visit over an average lifetime of 10 years. The customer lifetime value
would be calculated as: $17 x 12 x 10 = $2,040.
How do you calculate the lifetime value of a customer?
To calculate customer lifetime value, multiply the average revenue or profit 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 customer lifetime value is:

CLV = Average Transaction Size x Number of Transactions x Retention Period

What is customer lifetime value, and why is it important?

Customer lifetime value represents the total earnings from a customer over the duration of their
relationship with the business. This helps a company forecast profitability, set customer
acquisition budgets and determine goals for growth and improvement.