A Step-by-step

Guide to Calculating
Customer Lifetime
Value (CLV)
Prepared by: Geoff Fripp, Adjunct Marketing Lecturer
The University of Sydney

http://www.clv-calculator.com/
What is Customer Lifetime
Value?
• Customer lifetime value is a measure of customer
profitability over time
• CLV can be defined as “a measure of a customer’s
aggregate profit to the firm over the total time that the
customer deals with the firm”
• CLV is calculated as a single dollar number, which
summarizes the net profit/loss position of the customer’s
total relationship with the firm
• It is calculated on per customer basis, but is more usually
determined for an the average customer within a
particular market segment
• A firm will calculate multiple CLV’s for different customer
segments
Two calculation
methods
The Simple CLV
Formula THE FORMULA
Annual profit contribution per customer X
Average number of years that they remain a customer
Less the initial cost of customer
acquisition

WHAT INFORMATION DO WE NEED?

1. Initial cost of customer acquisition
2. Annual profit contribution per customer
3. Average customer retention rate
The CLV
Calculation

We start with this

information

We need to calculate
this information
 CLV Calculation: Step
One
Average Acquisition Cost 500
Average Customer Profit pa 1000
Customer Retention Rate 75%
Customer Churn Rate Churn rate is 1 –
25% retention rate

Simple CLV ???

Average Lifetime in Years ???

NOTE: Retention rate and churn

(loss) rate always add to 100%
CLV Calculation: Step Two
SIMPLE CLV

Average Acquisition Cost 500

Average Customer Profit pa 1000
Customer Retention Rate 75%
Customer Churn Rate 25%
Average Lifetime in Years 4 Average lifetime in
years is 1 / churn rate
Simple CLV ???

That is, the number of times

the churn rate goes into 100%
CLV Calculation: Step
Three
SIMPLE CLV

Average Acquisition Cost 500

Average Customer Profit pa 1000
Customer Retention Rate 75%
Customer Churn Rate 25%
Average Lifetime in Years 4
CLV is time/years X
Simple CLV 3,500 annual profit –
acquisition cost

EXAMPLE: 4 X $1,000 - $500

The Complete CLV
Formula THE FORMULA
Annual profit contribution per customer (for each year) X
The customer retention rate (for each year) less
The initial cost of customer acquisition
With each year adjusted by an appropriate discount rate

WHAT INFORMATION DO WE NEED?

1. Initial cost of customer acquisition
2. Annual revenue contribution per customer
3. Annual direct costs per customer
4. Annual customer retention rate
5. The discount rate to be used
Full CLV Calculation:
Start
COMPLETE CLV Year 0 1 2 3 4 5

Average Acquisition Cost 500

Average Customer Revenue 500 1,000 1,500 2,000 2,500

Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit ??? ??? ??? ??? ???

Customer Retention Rate 100% 60% 65% 70% 75%

Cumulative Retention Rate ??? ??? ??? ??? ???

Likely Customer Profit ??? ??? ??? ??? ???

Discount Rate 1 1.10 ??? ??? ??? ???

CLV - per year ??? ??? ??? ??? ??? ???

Cumulative CLV ??? ??? ??? ??? ??? ???

We need to START with the figures in BLUE and we need to

CALCULATE the figures in YELLOW
Customer Lifetime Value will be in the bottom-right GOLD cell
Full CLV Calculation: Step
One
COMPLETE CLV

Average Acquisition Cost

Year 0

500
1 2 3 4 5

Average Customer Revenue 500 1,000 1,500 2,000 2,500

Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit 200 400 600 800 1,000

Customer Retention Rate 100% 60% 65% 70% 75%

Cumulative Retention Rate ??? ??? ??? ??? ???

Likely Customer Profit ??? ??? ??? ??? ???

Discount Rate 1 1.10 ??? ??? ??? ???

CLV - per year ??? ??? ??? ??? ??? ???

Cumulative CLV ??? ??? ??? ??? ??? ???

Average customer profit each year is simply average customer

REVENUE less average customer COSTS
Full CLV Calculation: Step
Two
COMPLETE CLV Year 0 1 2 3 4 5

Average Acquisition Cost 500

Average Customer Revenue 500 1,000 1,500 2,000 2,500

Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit 200 400 600 800 1,000

Customer Retention Rate 100% 60% 65% 70% 75%

Cumulative Retention Rate 100% 60% 39% 27% 20%

Cumulative retention ???

Likely Custome r Profit rate is the???
compounding
??? effect
??? of losing
??? customers
We start with 100% of customers and we keep 60% in year 2. In year 3 we
Discount Rate keep 65% 1of those remaining, which
1.10is 65%??? ??? = 39%
of the 60%
??? ???
CLV - per year ??? ??? ??? ??? ??? ???
Cumulative CLV ??? ??? ??? ??? ??? ???

Cumulative retention rate indicates the % probability of receiving the

customer’s business (revenues and costs) in future years
Full CLV Calculation: Step
Three
COMPLETE CLV Year 0 1 2 3 4 5

Average Acquisition Cost 500

Average Customer Revenue 500 1,000 1,500 2,000 2,500

Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit 200 400 600 800 1,000

Customer Retention Rate 100% 60% 65% 70% 75%

Cumulative Retention Rate 100% 60% 39% 27% 20%

Likely Customer Profit 200 240 234 218 205

Discount Rate 1 1.10 ??? ??? ??? ???

CLV - per year ??? ??? ??? ??? ??? ???

Cumulative CLV ??? ??? ??? ??? ??? ???

Likely customer profit each year = Average Customer Profit (in

row 3) X Cumulative Retention Rate (% probability of the
customer still buying from our firm)
Example for Year 3: $600 X 39% = $234
Full CLV Calculation: Step
Four
COMPLETE CLV Year 0 1 2 3 4 5

Average Acquisition Cost 500

Average Customer Revenue 500 1,000 1,500 2,000 2,500

Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit 200 400 600 800 1,000

Customer Retention Rate 100% 60% 65% 70% 75%

Cumulative Retention Rate 100% 60% 39% 27% 20%

Likely Customer Profit 200 240 234 218 205

Discount Rate 1 1.10 1.21 1.33 1.46 1.61

CLV - per year ??? ??? ??? ??? ??? ???

Cumulative CLV ??? ??? ??? ??? ??? ???

Future discount rates are compounded on a yearly basis

In this case, the discount rate is 10%
Future years are 1.1 X 1.1 = 1.21 X 1.1 = 1.33, and so on
Full CLV Calculation: Step
Five
COMPLETE CLV Year 0 1 2 3 4 5

Average Acquisition Cost 500

Average Customer Revenue 500 1,000 1,500 2,000 2,500

Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit 200 400 600 800 1,000

Customer Retention Rate 100% 60% 65% 70% 75%

Cumulative Retention Rate 100% 60% 39% 27% 20%

Likely Customer Profit 200 240 234 218 205

Discount Rate 1 1.10 1.21 1.33 1.46 1.61

CLV - per year -500 182 198 176 149 127

Cumulative CLV ??? ??? ??? ??? ??? ???

Contribution to CLV on a yearly basis is the “likely customer

profit” divided by the discount rate
For example, in year 3: profit = $234 / 1.33 = $176
Full CLV Calculation: Step
Six
COMPLETE CLV Year 0 1 2 3 4 5

Average Acquisition Cost 500

Average Customer Revenue 500 1,000 1,500 2,000 2,500

Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit 200 400 600 800 1,000

Customer Retention Rate 100% 60% 65% 70% 75%

Cumulative Retention Rate 100% 60% 39% 27% 20%

Likely Customer Profit 200 240 234 218 205

Discount Rate 1 1.10 1.21 1.33 1.46 1.61

CLV - per year -500 182 198 176 149 127

Cumulative CLV -500 -318 -120 56 205 332

Cumulative CLV is the running total of CLV per year

Our key CLV figure is in the GOLD cell = $332

Full CLV Calculation: Outcomes
COMPLETE CLV Year 0 1 2 3 4 5

Average Acquisition Cost 500

Average Customer Revenue 500 1,000 1,500 2,000 2,500

Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit 200 400 600 800 1,000

Customer Retention Rate 100% 60% 65% 70% 75%

Cumulative Retention Rate 100% 60% 39% 27% 20%

Likely Customer Profit 200 240 234 218 205

Discount Rate 1 1.10 1.21 1.33 1.46 1.61

CLV - per year -500 182 198 176 149 127

Cumulative CLV -500 -318 -120 56 205 332
CLV = $332 – which is a positive number – which is great
This means that the $500 acquisition cost has generated good profits
for the firm
As a 10% discount rate has been used, the ROI on the marketing
investment is MORE than a 10% return
Payback on customer acquisition costs is delivered in Year 3
For lots more
information…
Please visit www.clv-calculator.com

On this website you will find:

• A free Excel spreadsheet for calculating

CLV as shown in this presentation
• Quick CLV calculators
• Lots of CLV information and examples
• Plus instructional videos

http://www.clv-calculator.com/