What Is Customer Lifetime Value (CLV) & How to Calculate It

We take a quick look at why calculating your customers' lifetime value is key for any business

What Is Customer Lifetime Value (CLV) & How to Calculate It

4 Min Read

There are a number of metrics, formulas, and calculations used to evaluate the success of ad campaigns, and MNTN has been doing a deep dive into the data that every marketer should be tracking.

We have already covered ROAS, conversion rate, and cost per acquisition, so it’s time to take a look at customer lifetime value (CLV), what it is, and how to calculate it effectively.

What Is Customer Lifetime Value?

Customer Lifetime Value (CLV) is a marketing metric that determines the overall average amount of revenue a customer provides. In other words, it measures the profit your company can expect to earn over an entire relationship with a single customer.

Sometimes referred to as lifetime value (LTV), calculating your customer lifetime value is an important step in fully understanding your customers, as well as making decisions regarding sales, performance marketing, and product development.

Why Is Customer Lifetime Value Important?

Customer lifetime value provides a range of benefits to marketers, which are as follows:

  • Business Forecasting: CLV allows businesses to forecast future revenue based on existing customers, aiding in budgeting and planning.
  • Resource Allocation: Understanding CLV helps businesses allocate resources more effectively, ensuring high-value customers receive the attention they deserve.
  • Marketing Spend: By knowing the CLV, businesses can better allocate marketing spend, investing in acquiring customers that are likely to generate more revenue in the long run.
  • Customer Retention: CLV emphasizes the importance of customer retention, underlining the fact that maintaining existing customers can be more profitable than acquiring new ones.
  • Profitability Analysis: CLV is a critical metric in evaluating a company’s profitability over time, which helps in making informed business decisions and strategic planning.

Calculating your CLV will help your company clearly define your goals regarding marketing and sales strategies. This will ultimately improve many elements of your long-term customer relationships by reducing acquisition costs and increasing retention of the customers who provide the most value to your company.

Again, not all customers are equally valuable. So calculating CLV will allow you to increase profit by dedicating more effort and resources towards your higher-value customers. 

How to Calculate Customer Lifetime Value

The customer lifetime value calculation is a projection rather than a metric based on hard numbers, so in order to measure the relationship your business has with a customer, you will have to make informed assumptions.

Customer Lifetime Value is calculated by multiplying the average time spent as a customer with the average revenue they bring in on a monthly basis. One CLV formula you can use as a baseline for this metric is:

CLV = Average Customer Lifetime Span * Average Customer Value

An Example of How It’s Used

For example, if a customer spends $100 per month, and continues their relationship with your company for 10 months, the lifetime value of a customer would be $1,000. One thing to keep in mind is that CLV does not take operating expenses into account. However, it does include customer acquisition costs and any other marketing expenses that went into that particular customer. 

What Is a Good Customer Lifetime Value?

A good customer lifetime value will depend on your company, industry, and products. It can often be useful to compare any new CLVs against old ones; if they are larger, it can indicate better customer retention. The higher your customer lifetime value, the better﹣high CLVs show that customers love your products, are spending money on them, and staying with you long term.

Another factor to consider is your cost per acquisition, which indicates how much it costs to get a single customer. The lower your CPA is compared to your CLV, the better your campaign is performing.

No matter what business you’re in, we bet we can help improve your LCV. Find out how we can help boost your Lifetime Customer Value.

Customer Lifetime Value (CLV): Final Thoughts

Wrapping up, customer lifetime value is a critical measure that encapsulates the total worth of a customer to a business over the entire span of their relationship. Understanding and correctly calculating CLV is crucial as it assists in making informed business decisions, designing effective marketing strategies, and ultimately improving long-term business profitability.