Customer lifetime value (CLV): What it is + how to calculate it

It’s not enough to acquire new customers—you also need to make sure those individuals stick around long-term. If, however, they churn before you get the chance to recoup the cost it took to acquire them, your bottom line will suffer.

Customer lifetime value is the ray of hope for organizations that need help building customer relationships. This important metric helps businesses identify the actions they need to take for continued engagement. This guide covers CLV in detail, its role in the customer experience (CX), and how you can use it to improve brand loyalty.

More in this guide:

• Why is customer lifetime value important?
• How to calculate customer lifetime value
• Customer lifetime value example
• How to increase customer lifetime value
• Frequently asked questions
• Improve your CLV with a comprehensive CX partner

Why is customer lifetime value important?

Customer lifetime value is important because it helps you understand how your customers behave. Here are some of the top reasons you should track CLV.

Increases revenue

The correlation is simple: The more money customers spend with your business, the higher your revenue will be. When organizations focus on improving CLV and related customer analytics, they can better tailor their product offerings to their audience and engage in upselling and cross-selling activities. When executed correctly, this means more money for your business.

Identifies areas of improvement

Companies can gain insight into the health of their consumer relationships by analyzing CLV and CLV-related metrics like customer churn rate, average order value, purchase frequency, and total revenue. This kind of information can help organizations identify areas of improvement and any bottlenecks in day-to-day operations.

A declining CLV typically indicates product quality, messaging, or customer experience issues. For example, if your retention metrics are consistently low, you may consider investing in customer retention software to improve customer lifetime value.

Helps target your customers

When companies understand customer lifetime value, they can create better and more effective outreach campaigns. Businesses can segment individuals based on their predicted value, behavior, and preferences and establish a marketing strategy that appeals to high-value customers.

This targeted approach ensures that outreach budgets are allocated effectively. Additionally, it gives organizations the flexibility to spend more to acquire customers that have a higher CLV. Doing so enhances the effectiveness of marketing efforts, improves customer satisfaction, and increases long-term profitability.

Enhances customer loyalty

Customer lifetime value and customer loyalty go hand in hand. When businesses implement strategies to increase CLV, they’re naturally increasing loyalty as well. For example, organizations can ensure a comprehensive CX by providing proactive customer service through open communication with customers and collecting customer feedback through surveys. This can increase loyal customers, CLV, and revenue.

How to calculate customer lifetime value

You can calculate customer lifetime value with the following formula:

Before you calculate CLV, you’ll first need to find your customer value. Figure out this metric by multiplying the average number of purchases each customer makes by the average purchase value. From there, multiply that figure by your average customer life span to determine your customer lifetime value.

Different businesses and industries have different standards for what constitutes an ideal customer lifetime value. Generally speaking, you should be shooting for a 3:1 ratio between CLV and customer acquisition cost (CAC)—or the cost it takes to gain a new customer. In other words, a good CLV would be $300 or above when you have a CAC of $100.

Customer lifetime value example

To better understand how to calculate CLV, let’s run through a hypothetical example. Below, we’ll detail how to use the formula and how you can use CLV to target the best customers.

A fictional SaaS company is researching its customer lifetime value to determine the best approach for outreach. It follows a tiered subscription-based pricing structure of $9, $19, and $29 and charges customers once per month.

One customer profile the SaaS company would like to target is middle-aged adults, specifically married individuals ages 30 to 50. Through market research, the company determined that these individuals will stay customers for an average of two years (24 months), and their average purchase amount is $19. The calculation for this customer profile is:

Another customer profile the SaaS company wants to target is young adults, specifically single individuals ages 18 to 25. Through market research, the company determined that these individuals will stay customers for 1.5 years (18 months) on average, and their average purchase amount is $25. The calculation for this customer profile is:

As you can see, the middle-aged customer profile has a $912 CLV compared to $675 for younger individuals. These outcomes signal that the SaaS business should target the first customer profile.

How to increase customer lifetime value

Now that we’ve run through the benefits of CLV and how to calculate it, let’s look at how to increase it. Here are some tips to improve your organization’s customer lifetime value.

1. Adopt a customer-first mindset

A customer-first philosophy puts the consumer at the center of organizational decision-making rather than focusing on products or profits. When businesses embrace this approach, they can deliver consistently positive customer experiences at every touchpoint in the customer journey.

Being a customer-first business means understanding your consumers completely, anticipating their needs, and giving them what they need before they know they need it. For example, an organization may email customers announcing and explaining a new product feature. By doing this, they can proactively help their customer base understand these features and limit calls to customer support.

2. Invest in the customer experience

Delivering a positive customer experience is a crucial component of building long-term customer relationships. An exceptional CX not only delights your customers but entices them to remain loyal to your brand.

Consider investing in CX tools like customer experience software. This type of platform allows teams to track and manage consumer interactions from a unified workspace, resulting in a more streamlined support experience.

3. Upgrade your customer onboarding

Some of the most crucial touchpoints in the business-consumer relationship are the interactions right after a customer purchases a product or service. Proper customer onboarding sets the stage for lasting relationships by educating consumers on the value of your product—and, most importantly, how to get the most out of it.

Comprehensive welcome emails, webinars, or ongoing support can provide a personalized onboarding process that prioritizes education and the specific needs of your consumer. This tailored approach will ensure your customer sees the importance of your business and sets the foundation for a lasting relationship.

4. Provide comprehensive, omnichannel support

Your consumers expect to be able to connect with your business on the channels most convenient to them, whether that be your website, app, social media page, or email. Businesses can create a consistent and connected customer experience across channels when they engage in omnichannel customer service.

For example, a customer may start a support interaction through social media but then want to move the conversation to email. An omnichannel approach allows businesses to seamlessly continue these conversations—even when switching mediums—without losing context. This level of attention to detail can enhance customer loyalty and, by proxy, CLV.

5. Develop long-lasting customer relationships

While all of our steps have the power to develop long-lasting customer relationships, it’s important to focus on this aspect explicitly. Building relationships requires a commitment to ongoing engagement and communication. You can do so in several ways:

• Stay connected with your customers through personalized content like newsletters, product updates, or product suggestions.

• Implement loyalty programs that entice customers to make referrals and repeat purchases.
• Seek out customer feedback and make product or process improvements based on responses.

• Send personalized re-engagement campaigns to inactive customers.

• Lean on customer data platforms to better understand your customers.

Long-lasting relationships are key to improving CLV. Use these steps and more to deliver consistent value to your customers.

Frequently asked questions

Improve your CLV with a comprehensive CX partner

Customer lifetime value is a crucial metric that informs businesses on how best to approach consumer interactions. You can increase CLV in a few ways, and one of the most effective is by partnering with a customer experience expert.

Zendesk boasts features like comprehensive agent dashboards, omnichannel support, and more to ensure you delight your customers with every interaction.

Try Zendesk for free today to improve your CLV.