Lifetime Value of a Customer & How do you measure it?

Customer lifetime value measures the profit your business makes from any given customer.

CLV is used in marketing to set an upper limit for marketing spend. It’s also helpful to business owners and marketers during the marketing budgeting process because it frames a company’s marketing investment in a realistic manner.

The customer lifetime value formula takes into account the fact that typically, the cost of acquiring a new customer only has to be met once.

How to Calculate CLV?

If you want your business to acquire and retain highly valuable customers, then it’s essential that your team learns what customer lifetime value is and how to calculate it.

Large businesses sometimes use several different customer lifetime value calculations during their marketing budgeting process, then average them to arrive at their final result. But for most small businesses, a simple LVC formula is best for estimating marketing spend. The LVC calculation in its simplest form is:

[Average Sales Price – (Your Cost of Goods per Sale + Acquisition Cost )] x Lifetime Number of Sales per Customer

Harvard Business School and Wikipedia both point out that there are simple ways to calculate customer lifetime value, and more complicated ways to perform this calculation. The more complex equations take into consideration concepts like:

  • the time value of money
  • variations in customer lifetimes and attrition rates
  • variations in buying patterns based on customer categories
  • customer retention costs

What can you do with Customer Lifetime Value?

CLV helps you make important business decisions about sales, marketing, product development, and customer support. For example:

  • Marketing: How much should I spend to acquire a customer?
  • Product: How can I offer products and services tailored for my best customers?
  • Customer support: How much should I spend to service and retain a customer?
  • Sales: What types of customers should sales reps spend the most time on trying to acquire?