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 relationship duration. It represents the net profit or revenue that a customer is expected to create 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 considers not only the initial purchase or transaction but also factors in subsequent purchases, 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: historical value and predictive value. As their names suggest, historical customer lifetime value represents all of the money that 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. 

Example of CLV

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 spent by a customer on each order.

2. Average frequency of orders: 4 times per month

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

3. Average lifespan as a customer: 2 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 x Average Frequency of Orders per Month x Average Lifespan as a Customer

CLV = $20 x 4 x 12 x 2 = $20 x 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: 

• Make better decisions: You can make more informed decisions with better data. CLV can help you decide where to spend marketing money, how to manage inventory, and other factors like production capacity. 

• Focus on customer loyalty: 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 to see signs of attrition and help you consider why customers keep returning (or not) to your brand. 

• Improve retention: Tracking CLV can help you pay attention to changes. This metric can help you understand what works well and what to fix when something goes wrong. 

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Customer lifetime value (CLV) is a key metric that helps businesses understand the total revenue a customer generates over their relationship. By considering factors like purchase history and future potential, CLV allows businesses to make informed decisions about customer acquisition, retention, and marketing strategies.

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