Customer lifetime value (CLV) is among the most important ecommerce metrics for any growing business. Earning new customers can require a lot of money. So measuring what those customers are worth using CLV and comparing it to your customer acquisition cost (CAC) allows you to determine how long it takes to recoup your investment.
Keep reading to learn the lifetime value calculation, see some examples in action, and find tips for improving your CLV so you can attract and retain loyal customers.
Customer lifetime value goes well beyond the initial purchase a customer makes. It shows you how valuable a customer is to your company throughout an unlimited period. This is measured in terms of the profit your company can generate from your customers. CLV is the amount of money a customer will spend throughout a lifetime of interactions with your brand.
Measuring customer lifetime value can also help you identify your company’s most valuable customers out of a larger audience if combined with customer segmentation.
And when compared with your CAC, you can also use CLV to learn more about how much it costs to acquire each customer and how to maximize your current customers' value.
That’s important because retaining existing customers is typically more profitable than acquiring new customers.
Largely, yes. Most of the time, marketers use CLV and LTV (or even sometimes CLTV) interchangeably. Some people use LTV to refer to the aggregate lifetime spend of all customers and CLV to refer to the lifetime spend of one average customer. But at Triple Whale, we consider them to be the same concept. You’ll see this calculation displayed as LTV in your Triple Whale dashboard.
There’s a little legwork to do before you’re ready to learn how to calculate lifetime value of a customer.
The CLV formula you’ll see below shortly requires a few other metrics:
Once you have those numbers handy, you can plug them all into your customer lifetime value calculation:
Customer Lifetime Value = Average purchase frequency x Average purchase value x Average gross margin x Average customer lifespan
Or, you can use a simplified version:
Customer Lifetime Value = Customer value x Average customer lifespan
With either formula, the result is a monetary value for how much the average customer spends during their relationship with your business.
There are three levels of CLV calculation: company-level CLV, segment-level CLV, and individual-level CLV.
The formula above calculates CLV at the company level. In other words, the result is how much the average customer will spend with your brand.
Segment-level CLV looks at the CLV for a specific segment of your customer base. First, you’ll need to make sure your customer segmentation, or the grouping of your customers based on shared characteristics like age, spending habits, and preferences, is solid. If you haven’t segmented your customers yet, Triple Whale’s customer retention tools can help you build smarter segments with our Segment Builder and then put those segments to work for you with our Segment Sync and Cohort Analysis.
Then, use the formula above but input data specific to the segment in question. In other words, you’ll need to know the average purchase frequency, average purchase value, and average customer lifespan for that segment.
When you go through this exercise for high-value segments, you’ll be able to zero in on what’s making them so valuable (and hopefully encourage even more conversions). And when you calculate customer lifetime value for less valuable segments, you might be able to spot opportunities to improve your relationship with and revenue from these shoppers.
Individual-level CLV, on the other hand, calculates the value of one specific customer. This is pretty granular and not all that necessary for most businesses, but it can be useful.
For example, let’s say a customer service representative fields a call from a user wishing to cancel their subscription. They’re able to quickly pull up this individual’s CLV and see it’s among the highest for your brand, so they offer a special discount available only to VIP customers to prevent their churn. On the other hand, if the rep sees this individual's CLV is low, they might politely thank them for being a customer and proceed with the cancellation.
To calculate individual-level CLV, you don’t need to do the averages in the formula above. Instead, try this:
Individual-level CLV = That customer’s revenue per year x Lifespan in years you can expect them to stay with you - Cost of acquiring and maintaining that customer
So far, we’ve based our CLV calculations on data from customers as they are right now or how they’ve behaved in the past. But this isn’t the only way to look at CLV.
Traditional CLV calculations use the formula above. They take into consideration past customer behaviors to find the various averages used to calculate CLV at a company level.
This is sometimes also called traditional CLV, and it is still based on past customer behaviors. But where traditional CLV uses averages, historical CLV uses specific transactions, making it more precise if you’re calculating individual-level CLV, for example.
Historical CLV is based on the total profit your business has made in the past and only requires data from previous purchases. Here's the formula:
Historical CLV = (Transaction 1 + transaction 2 + transaction 3) / Average gross margin
You can use as many transactions as you like in this formula, but the formula's accuracy will increase when you use more.
Historical and traditional CLV can only determine what a customer’s value was, not what it can be.
Predictive CLV looks farther into the future by using expected lifespan rather than average customer lifespan.
Predictive CLV = Customer value x Expected lifespan
To calculate expected lifespan, you can use a figure based on previous customer behavior, use an average across your customers, or make an estimated guess. But whatever you land on, remember it’s the data point that predicts the accuracy of your calculation.
Predictive CLV helps you direct some attention to customers in early stages of their relationship with your brand who have the potential to become highly valuable shoppers. If you ignore these customers to focus on your most visible, loyal shoppers, you may miss out on highly lucrative growth opportunities.
So what does all this actually look like in the real world? Here are a few customer lifetime value examples to learn from.
Imagine a small ecommerce shop that sells handmade skincare products. Their average customer buys from them five times a year over a course of three years and typically spends $60. Their gross margin is 65%.
5 (annual purchases) x 60 (average purchase value) x 0.65 (average gross margin) x 3 (average customer lifespan) = $585
This brand’s average customer is valued at $585 over their relationship with the business.
Because Fido always needs something to eat, a pet food supplier might have a higher average purchase frequency than the example above. Let’s say customers at this business shop 12 times a year and spend an average of $45. They stick with the brand for 4 years, and the company makes an average gross margin of 40%.
12 x 45 x 0.40 x 4 = $864
The average customer spends $864 with this business.
But what about if purchases are less frequent but larger? Picture a brand that sells laptops for $2,000 and imagine customers buy a new laptop every 5 years. They have an average gross margin of 20%, and customers are typically loyal for 15 years.
0.2 x 2,000 x 0.20 x 15 = $1,200
Over the course of their time interacting with this brand, customers will be valued at $1,200.
Typically, a higher CLV equals higher revenue. That means calculating customer lifetime value allows you to see how well you’re doing and capitalize on valuable customers where you can. Many marketers spend too much time chasing lower-value customers. CLV teaches brands how to allocate time toward acquiring higher-value customers.
But that’s not the only way to make CLV work for you.
CLV helps you craft more accurate predictions and take measured risks. Identifying your target customer’s behavior can assist in preparing a fool-proof marketing strategy to engage them.
Once you understand your customers' behavior, you’ll know more about how to keep them coming back. Identifying customers with a high CLV will give you hints on new and innovative ways to improve customer retention.
For example, you can connect with your customers on social media by broadcasting your message to customers with a high CLV. Let’s say you make vegan products. After identifying your high-CLV customers on their favorite platforms, you could share vegan news, recipes, and new products, giving them a tangible reason to stick with your brand that doesn't include your offerings alone.
When you segment your audience by high CLV, you can offer your VIP shoppers additional products to add to their carts to increase order value and revenue. Think about a fast-food restaurant: Customers are likely to purchase a combo meal deal even if they only want a burger; they’ve been tempted by the deal to increase their order value.
Strategically position your prices to make it seem better for your customers to go for an annual subscription compared to a weekly or monthly subscription or a larger order compared to a smaller one. Changes in your CLV will tell you if your strategy is working. If it grows, you're on the right track.
CLV can help you see shifts in consumer behavior. Identifying these is key in being able to fix potential problems or capitalize on certain trends quickly.
If these changes are unique to a specific segment of customers, asking for their feedback can be invaluable. The customers with the lowest CLVs will have likely seen your brand at its worst, so they’ll have lots of great feedback to give.
One advantage of CLV is it gives you a bird’s-eye view of your marketing expenses, efforts, campaigns, and strategies. Seeing the financial effects of your marketing can reveal where change is necessary. This, in turn, can help you strike a balance between your short-term and long-term marketing goals. Knowing when and how much to invest in various scenarios can do wonders for your decision-making.
When you predict customer lifetime value, you can make forward-looking decisions about your company’s staffing, inventory, and production costs, among others. If these choices aren’t based on data, you might lose money or have a hard time keeping up with orders.
You can get helpful context for your CLV by comparing it to your customer acquisition cost, or CAC, with the CLV to CAC ratio. This calculation is especially helpful for startups, which may not be profitable early on while acquiring new customers is top priority, according to Harvard Business School, because it gives you a picture of the potential long-term health of your new business.
To calculate this ratio, simply divide your CLV by your CAC.
For example, if your average customer spends $150 with your brand over the course of your relationship with them and you spend $50 to acquire a new customer, your ratio is 3:1. That means the customer delivers 3 times more value than it takes to acquire them.
And that’s a good benchmark to aim for, according to HBS. If your CLV/CAC is less than 1, you’re spending more on customers than they’re spending on you. Between 1 and 2, you’re breaking even or making a small profit. But at 3 or higher, you’re spending significantly less than you’re making over the long haul.
That said, there are also some challenges of finding and using your business’s CLV.
As you likely saw with the formula above, it takes several supplementary metrics to measure your CLV. If you don’t have a solid system for tracking and obtaining all that data regularly, your CLV may be hard to measure. But Triple Whale’s suite of retention tools can automate this process for you and present the results clearly on your data dashboard.
If you only calculate your company-level CLV, you might not notice when you have a sub-optimal CLV among certain customer segments. Your high-level CLV results can look strong while masking poor CLV among a specific group of shoppers. Without segment-level data, you won’t know what issues to address.
CLV assumes your average customer will spend the same amount of money with your brand over every year they stay in business with you. This ignores natural fluctuations in the market, seasonal upticks, and other external factors that may cause their real spend to differ from their forecasted spend.
Speaking of forecasting: Calculating CLV can give you some insight on how things may play out in the future for your business, but predictions are not guarantees. Use information about customer lifetime value to your advantage, while also keeping in mind that this forecast may not come true.
Improving your CLV will play a critical role in the long-term success of your company. Here are a few ways to begin boosting yours:
If you want to increase your customer lifetime value and customer retention rate, making your onboarding process more accessible is a great place to start. Design your approach around your customers’ needs and expectations. Make sure you’re not asking for so much data collection right off the bat that they get fatigued and abandon your onboarding process.
When sales go up, CLV usually does too. Focus on giving your target audience more of what they’re looking for, but with your own unique selling proposition. Make it as easy as possible for customers to find and buy products on your online store.
That includes:
Consider offering additional items or higher-priced options to engaged customers during the purchase process to boost average order value and CLV. This is typically easier to do than bringing in new customers and less risky than simply increasing the prices of your products overall (which may drive some customers away).
Don’t forget the bread and butter of your income: long-term customer relationships. Building brand loyalty by widening your scope and prioritizing customer retention should be your primary focus when you want to improve CLV.
Maintaining top-notch customer support will go a long way. Go above and beyond with customer service: Share clear links to contact information, respond promptly to inquiries and issues, and personalize the experience at every touchpoint possible.
You can also try:
While it's tempting to focus on conversion and retention rate, CLV comes down to customer loyalty and relationships. Customers, products, and the times are constantly evolving, which means that you should consistently measure, test, and assess everything you do.
If you want to grow your company, it’s essential to understand how customer lifetime value works. Grasping the importance of CLV for your short-term and long-term goals, learning how to calculate it, and constantly finding ways to improve it will position your business to flourish for years to come.
While there are many other metrics to measure, it doesn’t get more critical than figuring out the value your customers can provide over time. Armed with the information and advice above, you can optimize your customer retention and determine how to develop long-lasting relationships.
Triple Whale can deliver sharper insights into your business’s finances, reporting, and return on investment with our proprietary pixel technology and other retention tools. Book a demo today!
Customer lifetime value tells you how valuable a customer is to your company during their relationship with your brand. This allows you to more effectively market to and retain your most valuable customers and brainstorm ways to increase conversions among your less valuable customers.
It’s helpful to compare these two metrics so you can gain insight into how much your average customer spends with your business versus how much you spend to acquire them. This is called the CLV to CAC ratio, and ideally you want it to be 3:1 or higher. To calculate it, divide your CLV by your CAC.
Most marketers use them interchangeably. That said, some use LTV to refer to all customers and CLV to refer to the average customer.
Customer lifetime value (CLV) is among the most important ecommerce metrics for any growing business. Earning new customers can require a lot of money. So measuring what those customers are worth using CLV and comparing it to your customer acquisition cost (CAC) allows you to determine how long it takes to recoup your investment.
Keep reading to learn the lifetime value calculation, see some examples in action, and find tips for improving your CLV so you can attract and retain loyal customers.
Customer lifetime value goes well beyond the initial purchase a customer makes. It shows you how valuable a customer is to your company throughout an unlimited period. This is measured in terms of the profit your company can generate from your customers. CLV is the amount of money a customer will spend throughout a lifetime of interactions with your brand.
Measuring customer lifetime value can also help you identify your company’s most valuable customers out of a larger audience if combined with customer segmentation.
And when compared with your CAC, you can also use CLV to learn more about how much it costs to acquire each customer and how to maximize your current customers' value.
That’s important because retaining existing customers is typically more profitable than acquiring new customers.
Largely, yes. Most of the time, marketers use CLV and LTV (or even sometimes CLTV) interchangeably. Some people use LTV to refer to the aggregate lifetime spend of all customers and CLV to refer to the lifetime spend of one average customer. But at Triple Whale, we consider them to be the same concept. You’ll see this calculation displayed as LTV in your Triple Whale dashboard.
There’s a little legwork to do before you’re ready to learn how to calculate lifetime value of a customer.
The CLV formula you’ll see below shortly requires a few other metrics:
Once you have those numbers handy, you can plug them all into your customer lifetime value calculation:
Customer Lifetime Value = Average purchase frequency x Average purchase value x Average gross margin x Average customer lifespan
Or, you can use a simplified version:
Customer Lifetime Value = Customer value x Average customer lifespan
With either formula, the result is a monetary value for how much the average customer spends during their relationship with your business.
There are three levels of CLV calculation: company-level CLV, segment-level CLV, and individual-level CLV.
The formula above calculates CLV at the company level. In other words, the result is how much the average customer will spend with your brand.
Segment-level CLV looks at the CLV for a specific segment of your customer base. First, you’ll need to make sure your customer segmentation, or the grouping of your customers based on shared characteristics like age, spending habits, and preferences, is solid. If you haven’t segmented your customers yet, Triple Whale’s customer retention tools can help you build smarter segments with our Segment Builder and then put those segments to work for you with our Segment Sync and Cohort Analysis.
Then, use the formula above but input data specific to the segment in question. In other words, you’ll need to know the average purchase frequency, average purchase value, and average customer lifespan for that segment.
When you go through this exercise for high-value segments, you’ll be able to zero in on what’s making them so valuable (and hopefully encourage even more conversions). And when you calculate customer lifetime value for less valuable segments, you might be able to spot opportunities to improve your relationship with and revenue from these shoppers.
Individual-level CLV, on the other hand, calculates the value of one specific customer. This is pretty granular and not all that necessary for most businesses, but it can be useful.
For example, let’s say a customer service representative fields a call from a user wishing to cancel their subscription. They’re able to quickly pull up this individual’s CLV and see it’s among the highest for your brand, so they offer a special discount available only to VIP customers to prevent their churn. On the other hand, if the rep sees this individual's CLV is low, they might politely thank them for being a customer and proceed with the cancellation.
To calculate individual-level CLV, you don’t need to do the averages in the formula above. Instead, try this:
Individual-level CLV = That customer’s revenue per year x Lifespan in years you can expect them to stay with you - Cost of acquiring and maintaining that customer
So far, we’ve based our CLV calculations on data from customers as they are right now or how they’ve behaved in the past. But this isn’t the only way to look at CLV.
Traditional CLV calculations use the formula above. They take into consideration past customer behaviors to find the various averages used to calculate CLV at a company level.
This is sometimes also called traditional CLV, and it is still based on past customer behaviors. But where traditional CLV uses averages, historical CLV uses specific transactions, making it more precise if you’re calculating individual-level CLV, for example.
Historical CLV is based on the total profit your business has made in the past and only requires data from previous purchases. Here's the formula:
Historical CLV = (Transaction 1 + transaction 2 + transaction 3) / Average gross margin
You can use as many transactions as you like in this formula, but the formula's accuracy will increase when you use more.
Historical and traditional CLV can only determine what a customer’s value was, not what it can be.
Predictive CLV looks farther into the future by using expected lifespan rather than average customer lifespan.
Predictive CLV = Customer value x Expected lifespan
To calculate expected lifespan, you can use a figure based on previous customer behavior, use an average across your customers, or make an estimated guess. But whatever you land on, remember it’s the data point that predicts the accuracy of your calculation.
Predictive CLV helps you direct some attention to customers in early stages of their relationship with your brand who have the potential to become highly valuable shoppers. If you ignore these customers to focus on your most visible, loyal shoppers, you may miss out on highly lucrative growth opportunities.
So what does all this actually look like in the real world? Here are a few customer lifetime value examples to learn from.
Imagine a small ecommerce shop that sells handmade skincare products. Their average customer buys from them five times a year over a course of three years and typically spends $60. Their gross margin is 65%.
5 (annual purchases) x 60 (average purchase value) x 0.65 (average gross margin) x 3 (average customer lifespan) = $585
This brand’s average customer is valued at $585 over their relationship with the business.
Because Fido always needs something to eat, a pet food supplier might have a higher average purchase frequency than the example above. Let’s say customers at this business shop 12 times a year and spend an average of $45. They stick with the brand for 4 years, and the company makes an average gross margin of 40%.
12 x 45 x 0.40 x 4 = $864
The average customer spends $864 with this business.
But what about if purchases are less frequent but larger? Picture a brand that sells laptops for $2,000 and imagine customers buy a new laptop every 5 years. They have an average gross margin of 20%, and customers are typically loyal for 15 years.
0.2 x 2,000 x 0.20 x 15 = $1,200
Over the course of their time interacting with this brand, customers will be valued at $1,200.
Typically, a higher CLV equals higher revenue. That means calculating customer lifetime value allows you to see how well you’re doing and capitalize on valuable customers where you can. Many marketers spend too much time chasing lower-value customers. CLV teaches brands how to allocate time toward acquiring higher-value customers.
But that’s not the only way to make CLV work for you.
CLV helps you craft more accurate predictions and take measured risks. Identifying your target customer’s behavior can assist in preparing a fool-proof marketing strategy to engage them.
Once you understand your customers' behavior, you’ll know more about how to keep them coming back. Identifying customers with a high CLV will give you hints on new and innovative ways to improve customer retention.
For example, you can connect with your customers on social media by broadcasting your message to customers with a high CLV. Let’s say you make vegan products. After identifying your high-CLV customers on their favorite platforms, you could share vegan news, recipes, and new products, giving them a tangible reason to stick with your brand that doesn't include your offerings alone.
When you segment your audience by high CLV, you can offer your VIP shoppers additional products to add to their carts to increase order value and revenue. Think about a fast-food restaurant: Customers are likely to purchase a combo meal deal even if they only want a burger; they’ve been tempted by the deal to increase their order value.
Strategically position your prices to make it seem better for your customers to go for an annual subscription compared to a weekly or monthly subscription or a larger order compared to a smaller one. Changes in your CLV will tell you if your strategy is working. If it grows, you're on the right track.
CLV can help you see shifts in consumer behavior. Identifying these is key in being able to fix potential problems or capitalize on certain trends quickly.
If these changes are unique to a specific segment of customers, asking for their feedback can be invaluable. The customers with the lowest CLVs will have likely seen your brand at its worst, so they’ll have lots of great feedback to give.
One advantage of CLV is it gives you a bird’s-eye view of your marketing expenses, efforts, campaigns, and strategies. Seeing the financial effects of your marketing can reveal where change is necessary. This, in turn, can help you strike a balance between your short-term and long-term marketing goals. Knowing when and how much to invest in various scenarios can do wonders for your decision-making.
When you predict customer lifetime value, you can make forward-looking decisions about your company’s staffing, inventory, and production costs, among others. If these choices aren’t based on data, you might lose money or have a hard time keeping up with orders.
You can get helpful context for your CLV by comparing it to your customer acquisition cost, or CAC, with the CLV to CAC ratio. This calculation is especially helpful for startups, which may not be profitable early on while acquiring new customers is top priority, according to Harvard Business School, because it gives you a picture of the potential long-term health of your new business.
To calculate this ratio, simply divide your CLV by your CAC.
For example, if your average customer spends $150 with your brand over the course of your relationship with them and you spend $50 to acquire a new customer, your ratio is 3:1. That means the customer delivers 3 times more value than it takes to acquire them.
And that’s a good benchmark to aim for, according to HBS. If your CLV/CAC is less than 1, you’re spending more on customers than they’re spending on you. Between 1 and 2, you’re breaking even or making a small profit. But at 3 or higher, you’re spending significantly less than you’re making over the long haul.
That said, there are also some challenges of finding and using your business’s CLV.
As you likely saw with the formula above, it takes several supplementary metrics to measure your CLV. If you don’t have a solid system for tracking and obtaining all that data regularly, your CLV may be hard to measure. But Triple Whale’s suite of retention tools can automate this process for you and present the results clearly on your data dashboard.
If you only calculate your company-level CLV, you might not notice when you have a sub-optimal CLV among certain customer segments. Your high-level CLV results can look strong while masking poor CLV among a specific group of shoppers. Without segment-level data, you won’t know what issues to address.
CLV assumes your average customer will spend the same amount of money with your brand over every year they stay in business with you. This ignores natural fluctuations in the market, seasonal upticks, and other external factors that may cause their real spend to differ from their forecasted spend.
Speaking of forecasting: Calculating CLV can give you some insight on how things may play out in the future for your business, but predictions are not guarantees. Use information about customer lifetime value to your advantage, while also keeping in mind that this forecast may not come true.
Improving your CLV will play a critical role in the long-term success of your company. Here are a few ways to begin boosting yours:
If you want to increase your customer lifetime value and customer retention rate, making your onboarding process more accessible is a great place to start. Design your approach around your customers’ needs and expectations. Make sure you’re not asking for so much data collection right off the bat that they get fatigued and abandon your onboarding process.
When sales go up, CLV usually does too. Focus on giving your target audience more of what they’re looking for, but with your own unique selling proposition. Make it as easy as possible for customers to find and buy products on your online store.
That includes:
Consider offering additional items or higher-priced options to engaged customers during the purchase process to boost average order value and CLV. This is typically easier to do than bringing in new customers and less risky than simply increasing the prices of your products overall (which may drive some customers away).
Don’t forget the bread and butter of your income: long-term customer relationships. Building brand loyalty by widening your scope and prioritizing customer retention should be your primary focus when you want to improve CLV.
Maintaining top-notch customer support will go a long way. Go above and beyond with customer service: Share clear links to contact information, respond promptly to inquiries and issues, and personalize the experience at every touchpoint possible.
You can also try:
While it's tempting to focus on conversion and retention rate, CLV comes down to customer loyalty and relationships. Customers, products, and the times are constantly evolving, which means that you should consistently measure, test, and assess everything you do.
If you want to grow your company, it’s essential to understand how customer lifetime value works. Grasping the importance of CLV for your short-term and long-term goals, learning how to calculate it, and constantly finding ways to improve it will position your business to flourish for years to come.
While there are many other metrics to measure, it doesn’t get more critical than figuring out the value your customers can provide over time. Armed with the information and advice above, you can optimize your customer retention and determine how to develop long-lasting relationships.
Triple Whale can deliver sharper insights into your business’s finances, reporting, and return on investment with our proprietary pixel technology and other retention tools. Book a demo today!
Customer lifetime value tells you how valuable a customer is to your company during their relationship with your brand. This allows you to more effectively market to and retain your most valuable customers and brainstorm ways to increase conversions among your less valuable customers.
It’s helpful to compare these two metrics so you can gain insight into how much your average customer spends with your business versus how much you spend to acquire them. This is called the CLV to CAC ratio, and ideally you want it to be 3:1 or higher. To calculate it, divide your CLV by your CAC.
Most marketers use them interchangeably. That said, some use LTV to refer to all customers and CLV to refer to the average customer.
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Body Copy: The following benchmarks compare advertising metrics from April 1-17 to the previous period. Considering President Trump first unveiled his tariffs on April 2, the timing corresponds with potential changes in advertising behavior among ecommerce brands (though it isn’t necessarily correlated).
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