What Is Customer Lifetime Value (CLV)?

Customer lifetime value (CLV) is a metric used in business and marketing to assess the total monetary value a customer generates for a company over the entire duration of their relationship. It represents the net profit or revenue that a customer is expected to generate during their lifetime as a paying customer. Calculating CLV typically involves estimating the average customer lifespan, the average revenue generated per transaction, and the average number of transactions over the customer’s lifetime.

CLV takes into account not only the initial purchase or transaction but also factors in subsequent purchases as well as repeat business and the potential for upselling or cross-selling. By analyzing CLV, businesses can gain insights into the long-term profitability of their customer base and make informed decisions regarding customer acquisition, retention, and relationship management strategies. 

You can look at customer lifetime value in two different ways: the historical value and the predictive value. As their names suggest, the historical customer lifetime value represents all the money a customer has already spent with your brand to date, while predictive lifetime value estimates how much money the customer will spend in the future with your brand. 

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CLV formula

Imagine you own a local pizza restaurant, and you want to calculate the customer lifetime value for your average customer. Here are some hypothetical figures to work with:

1. Average order value: $20

This represents the average amount a customer spends on each order.

2. Average frequency of orders: Four times per month

On average, a customer visits or orders from your restaurant four times within a month.

3. Average lifespan as a customer: Two years

This refers to the average duration a customer stays loyal to your restaurant.

To calculate the CLV, you would multiply the average order value by the average frequency of orders per month and then multiply that by the average lifespan as a customer:

CLV = Average Order Value × Average Frequency of Orders per Month × Average Lifespan as a Customer

CLV = $20 × 4 × 12 × 2 = $20 × 96 = $1,920

In this example, the estimated CLV for a customer of your pizza restaurant is $1,920. This means that, on average, each customer is expected to generate a total revenue of $1,920 over a two-year period.

Why is customer lifetime value important? 

CLV is an important metric for a few reasons: 

• Making better decisions: When you have better data, you can make more informed decisions. CLV can help you make decisions about where to spend marketing money, how to manage inventory, and other factors like production capacity. 

• Understanding customer pain points: Calculating customer lifetime value gives you better data on how your customers act and think, their problems, and what they want from your products. CLV is important for spotting signs of attrition and helping you consider why customers keep returning (or not) to your brand. 

• Improving retention: By tracking CLV, you will be paying attention when something changes. This metric can help you understand what is working well and what to fix when something goes wrong. 

Related terms 

• Churn rate

• Target market

• Jobs to be done

• Social listening

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