Customer Lifetime Value is essential for any type of business, but it’s also quite a tricky KPI to work out.
Use our CLV calculator to work out your Customer Lifetime value in a few clicks.
Although our calculator works out your CLV there a lot of variations in the formula depending on who you speak to. Click here to view all formulas.
Customer Lifetime Value is the value of your customers relationship, essentially CLV is an estimation of how much money your customer will spend during your entire relationship. A simple method for calculating customer lifetime value would be –
The concept may seem straightforward but there’s more to working out the CLV than meets the eye.
Before we get to discussing the formula of CLV let’s go over why it’s an important KPI to measure.
There are a number of reasons why CLV is so important, the first being it helps you measure overall business growth. By setting benchmarks for your CLV you can compare your current CLV to past benchmarks and see where you’re headed.
Another reason why you’ll want to measure CLV is it allows you to create a foundation for your marketing, let’s say your customer has a Lifetime of 8 months and pays a monthly subscription of $38. Their average Lifetime value would be $304. You can use this as a guideline for where your Acquisition costs should be at.
You can focus on building a relationship with customers to make long term sales, often creating relationships and retaining customers is a lot cheaper than acquiring new customers.
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As mentioned above there are a number of different ways you can measure your CLV; and they can be quite daunting, that’s why we have calculators.
Here are a few simple ones:
This formula uses three metrics to work out your customer lifetime value at a basic level. The three metrics used in this formula are the average order value, number of repeat sales and the retention time.
The average order value is the average revenue each order generates and is worked out by dividing your revenue by total orders.
This is then multiplied by the number of repeat sales which is basically a metric used to measure the number of customers who have purchased from you more than once.
This is literally just the number of customer who have purchased from you multiple times.
The final metric is the average retention time.
To work out your ART you need to divide the number of customers who have purchased from you between two time periods and divide by the first time period.
This formula may seem a little more confusing but is basically the same as the first. The metrics in this formula can be translated to match those of the first method.
Purchase frequency = Repeat sales
Average lifespan = Retention rate
This formula has, for the most part the same metrics used to work out the CLV, but this time we include the Average gross margin.
The average gross margin can be worked out by subtracting revenue by the cost of products over the revenue.
Although this calculation gives you a better understanding of customer lifetime value and how much profit you generate from a customer, it does ignore all discounts and offers. That’s why you might like to use the following formula.
Again this method of working out your CLV isn’t dissimilar to the others, however this one includes the rate of discount which can be summed up as the interest rate used in discounted money analysis.
So which formula is the right one? Well they’re all correct and you should use the one that you have the correct data for, and that works for your business.
If you don’t have the right metrics at hand just work out your CLV using the metrics you do have available.
Alternatively you can use tools like this one to work it out for you.
Now that we’ve given you some formulas to work out the CLV, we can talk about increasing your CLV.
To do this we can look at the metrics we’ve used in the formula to work out the CLV.
If we increase average order value or repeat purchase rate, then the consequences of that will be an increase in CLV.
Here are a few ways we can do this.
Let’s start with Average order value. Here is a list of things you can do to try and increase your AOV:
Here’s an in depth post about how you can increase your average order value
Your repeat purchase rate can be increased in correlation to CLV, but there are some things we can do to try and increase customers return rate.
To do this we need to look at some examples laid out to us by big retailers like Amazon. Here are a few things we can do to increase our repeat purchase rate:
Customer Lifetime Value is one of the most important KPIs and whilst it is quite a simple KPI to understand it has a number of formulas that can be used to work it out.
Just keep in mind you only need to use the formula you have the metrics to figure out.
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