Customer lifetime value (CLV) is a metric that measures how much a customer's relationship with your business is worth over the course of their entire transaction with you. Knowing CLV can help you to determine an appropriate customer acquisition cost and focus on maintaining strong customer relationships.
How to Calculate Customer Lifetime Value:
1. Find the average purchase value.
First, you need to determine what the average purchase price is for your customers. To do this, simply divide your company's total revenue over the course of a year (or another period of time, if necessary) by the number of purchases made over that same period.
2. Find the purchase frequency rate.
Divide the number of purchases by the number of customers who made purchases in the same time period. This gives your average purchase frequency.
3. Determine customer value.
Now, you can multiply the average purchase value (Step 1) by the average purchase frequency (Step 2) to find your customer value.
4. Find average customer lifespan.
You need to go a bit further to find the lifetime customer value. This can be difficult if your business is not subscription-based since it is less clear when an active customer becomes an inactive one. You may need to develop your own policy for deeming a customer's relationship with your business to be over. For instance, if they have not made a purchase in the last six months, you may conclude that they are no longer one of your customers.
To determine the average customer lifespan for a subscription-based business, simply add up the total number of years that each customer continues to make purchases from your business, and then divide by the total number of customers.
5. Find lifetime customer value.
Finally, you can find the CLV by multiplying the customer value (Step 3) by the average customer lifespan (Step 4).
Customer Lifetime Value Formula:
CLV = Customer Value x Avg. Customer lifespan.
Customer Lifetime Value Example:
Box Office Supplies Inc. has a total revenue of $400,000 for the current year. During the same time period, customers of Box Office Supplies made 5,000 purchases. First, let's find the average purchase value:
$400,000/5,000 = $80
This means that the average purchase value was $80.00.
During the same year, 800 customers made purchases. To find the purchase frequency rate, we can divide the number of purchases by the number of customers:
5,000/800 = 6.25
Multiply the average purchase value and the purchase frequency rate to find the customer value:
$80 x 6.25 = $500
The average customer value is $500.
Now, we will assume for the sake of this example that the average customer lifespan is 4.5 years.
Finally, we can find the customer lifetime value by multiplying the average customer value by the average customer lifespan:
$500 x 4.5 = $2,250
Therefore, the customer lifetime value for Box Office Supplies Inc. is $2,250.
How do you calculate the lifetime value of a customer?
To find the lifetime value of a customer, multiply the average customer value by the average customer lifespan.
What is customer lifetime value and why is it important?
Customer lifetime value is a metric that shows how much a single customer is worth to your business during the entire course of your business relationship. CLV is important because it can tell you whether or not your customer acquisition cost is reasonable.
What is a CLV score?
CLV stands for Customer Lifetime Value. A business's CLV score shows how much an individual customer is worth during the lifetime of their relationship with the business.
How do you value customers?
You can value your customers using the customer lifetime value formula:
CLV = Customer Value x Avg. Customer lifespan
What is a LTV to CAC ratio?
The LTV to CAC ratio is a comparison of your lifetime customer value to your initial customer acquisition cost. A good LTV to CAC ratio shows that your customer is worth far more over the lifetime of their interaction with you than what you initially paid to acquire them.
Can CLV be negative?
Yes. If either your customer acquisition cost or your cost of maintaining a customer is greater than the revenue that is acquired from that customer, you will have a negative CLV.
How do you calculate lifetime value of a customer in Excel?
If you have a spreadsheet that includes your customer value and average customer lifespan, you can find the CLV by multiplying those two cells together.