What is Customer Lifetime Value (CLV)?

What is Customer Lifetime Value and why is it important

Customer Lifetime Value (or CLV) answers a simple question: what is your customer worth? While many businesses focus on finding new customers – existing customers are incredibly valuable yet often overlooked. Replacing a lost customer costs much more than acquiring a new one¹, so knowing what your current customers are worth (and keeping them) is vital.

Understanding, calculating and tracking the lifetime value of a customer can strengthen the position of your business. This valuable metric acts as a roadmap to where you have been, where you are now and where you are going. If this value begins to fall in comparison to the quarter or financial year before, it’s a signal you need to act – before there is a noticeable impact on your bottom line.

If the value is steadily rising – great news. This indicates your business approach is working, whether you’re deploying customer retention strategies or other tactics aimed at increasing sale frequency or volume – or both.

How to calculate Customer Lifetime Value

The basic Customer Lifetime Value equation is:

Average value of purchase x frequency of purchase x average lifespan of customer = CLV

For example:

Aida’s Candle Co

Amy buys a $31 scented candle every month for a year using an online candle subscription service. In this case, the CLV calculation is:

$31 x 12 x 1 = $372

Harlan’s Hampers

Harlan runs a corporate gift hamper business. For the last eight years an accountancy firm has ordered 30 hampers to be sent to clients twice a year to coincide with Christmas and end of financial year. Each hamper retails for $250 each. In this case, the CLV calculation is:

$7500 ($250 x 30) x 2 x 8 = $120,000

Whether you work out how to calculate CLV in Excel or use an online calculator[JS9.1], this simple formula can be applied to almost any business, large or small.

How to use Customer Lifetime Value

The CLV calculation can be used to get a clear picture of where your business stands. The results offer vital insights into many facets of your business, including brand loyalty, cash flow and purchasing frequency. This is what makes CLV such an important metric.

Many businesses use it to identify customer churn trends. For example, if the data reveals a large cohort of customers dropping off after a year, a business might implement customer retention strategies at that point to reverse that trend. Or, it can be used to assess the impacts of price increases or other business changes.

Importantly, you can use CLV to track everything from an individual customer’s value year-on-year to a category snapshot of all shoppers within a certain postcode or demographic. The more data you have access to, the more you can drill down for deeper insights.  

How to track Customer Lifetime Value

‘If you can’t measure it, you can’t manage it’ is a business adage that applies here. To accurately track CLV you need to capture key transactional data, including purchase history and order values.

eCommerce platforms like Shopify and customer relationship management software like Salesforce allow you to track revenue, frequency and the lifecycle of your customers, so mine that useful dashboard data and analytics for insights.

To find Customer Lifetime Value in Shopify, export value and sales data from the dashboard to Excel or Google Sheets, then calculate the value using the CLV formula.

Depending on the scale of your business, reviewing Customer Lifetime Value can be done monthly, quarterly or yearly. The more frequently you track it, the faster you can respond to trends that need reversing.

What is a good Customer Lifetime Value?

With so many different variables at play, there is no specific value to aim for when it comes to Customer Lifetime Value. Each industry and business will have different views of what a good CLV is, based on the average cost of the goods being sold and typical buying behaviour of customers.

Regardless, the figure is important because it gives a vital snapshot of your customer’s worth, which can help you make better choices about where to focus your attention. Given the cost of acquiring a new customer far outweighs the cost of keeping a current one, it’s important to implement retention strategies if your CLV starts to head south.

How to improve Customer Lifetime Value

You can increase Customer Lifetime Value by growing the average value of customer spend, lengthening the relationship with your customer, or both.

Each year your customers return, their Customer Lifetime Value increases - so it’s in your best interest to keep them on your books for as long as possible. Retaining existing customers for longer helps offset the cost associated with finding new ones.

On the other end of the equation is the average customer spend. Grow this by either increasing the value of each purchase, or frequency.

Here are some ways to improve Customer Lifetime Value, which we go into in further detail below:

1. Create a customer loyalty program
2. Gamify the experience
3. Create new sales channels
4. Look for upsell and cross-sell opportunities
5. Referral schemes
6. Seek and act on customer feedback

Create a customer loyalty program

From the humble, dog-eared coffee card to complex, multi-tiered frequent flyer clubs, customer loyalty programs are a powerful tool for boosting customer retention rates. Incentivise return visits with free products, discounts or other bonuses.

Gamify the experience

Gamification is often used to drive sales growth and customer retention. In-app shopping games and promotions (think: collect all the stars to win a prize or tick off these tasks to move up a tier) that aim to keep customers returning each day are commonly deployed by online retailers to boost engagement and build brand loyalty.

Open up more sales channels

Selling via only one channel can limit your takings. Take an omni-channel approach and you may experience a quick boost to your customer numbers. For example, if you sell mainly via your own website or a bricks-and-mortar store, this could mean tapping into a wider demographic by joining online marketplaces like eBay or Etsy. And don’t forget social media. Research indicates 60% of Aussie shoppers use social platforms for product discovery and one in two have bought something after seeing it on social media.² Make sure you’re enabling in-app shopping on Instagram, Facebook and TikTok to your business mix – or trial live shopping.

Find opportunities to cross-sell and upsell

Your current customer base is already an extremely valuable source of revenue, so find ways to sell more to your loyal customers and you may see a boost to your bottom line.

For eCommerce stores, upselling and cross-selling can be done easily by adding an in-cart cross-sell popups on platforms like Shopify.

Product bundling is another great way to introduce your customers to other products or services you sell. From craft supplies to beauty treatments, creating bundles of products at different price points can work well - no matter what business you’re in.

Expanding your product offering is another common cross-sell strategy. Examples are hospitality businesses selling branded merch – alongside their core offering, or creators and makers (like bakers, ceramicists and illustrators) running online and in-person masterclasses and workshops.

Start a referral scheme

Clients who already know and trust your brand are often your best salespeople. Word-of-mouth recommendations still hold sway in the digital age, whether you run an online wedding supply company or are in the pet food business.

A referral scheme where existing clients are rewarded for recommending your business to their family and friends not only directs more customers in your direction but acts as a positive way to reward loyal customers with discounts, free products or other incentives.

Listen to feedback

Improving your customer retention rate will automatically boost your average Customer Lifetime Value by limiting the amount of customer churn your business experiences. To keep customers coming back year after year, seek and act on feedback frequently.

Depending on what type of business you run, there are different ways to source genuine feedback from your customer base, including:

• Customer satisfaction surveys
• In-person or online focus groups
• Informal face-to-face conversations
• After-sales phone calls
• Online monitoring of review platforms like Trustpilot and Google reviews.

There are many reasons a customer may drop off; many of them are fixable. Price increases, inefficient processes, unclear communication, stock unavailability and delivery speed can all impact customer churn rates. Identify the contributing factors to customer losses and you’ll unlock how to keep them – hopefully for good.

Reconnect with lapsed customers

Inactive customer accounts are not lost causes. This group of people can be incredibly valuable to your business if you can re-establish a relationship. Getting in touch with customers who haven’t interacted with your business for a while is the first step towards getting them back and improving CLV.

Try these tried-and-true ways to win customers back:

• Send a personalised offer via SMS or email to incentivise a purchase. Free shipping could entice customers back.
• Use digital ads to retarget website visitors and keep your brand top-of-mind

If you’ve identified and addressed an issue, use social media or email to clearly communicate that you’ve made positive changes to your business. For example, ‘You spoke and we listened. We’ve started stocking plus-sized shirts again’.

Regardless of which strategies you adopt, focusing on existing or returning lapsed customers is a proven tactic for boosting sales in comparison to spending marketing funds on acquiring new customers. Keep a watchful eye on your Customer Lifetime Value metrics and you’ll be in a better position to maintain customer satisfaction and retain your customer base.