What is a Customer Lifetime Value?

Ruben Buijs
3 minutes • Aug 10, 2023 • Product Management

Customer Lifetime Value (CLV) is a crucial metric in product management that measures the total revenue a business can expect to generate from a single customer over the entire duration of their relationship. It estimates the net profit a customer will bring to the company throughout their lifetime. CLV helps businesses understand the value of each customer and guides decision-making processes related to marketing, sales, and customer retention strategies.

Examples

Let's consider an example to illustrate the concept of Customer Lifetime Value. Imagine a subscription-based streaming service with a monthly fee of $10. If the average customer stays subscribed for 2 years, the CLV of that customer would be $240 ($10 x 12 months x 2 years). This means that, on average, each customer is expected to generate $240 in revenue during their lifetime.

Another example could be an online retailer. If the average customer spends $50 per month and remains a customer for 5 years, the CLV would be $3,000 ($50 x 12 months x 5 years). This indicates that each customer is likely to contribute $3,000 in revenue over their lifetime.

Importance

Understanding Customer Lifetime Value is essential for several reasons:

  1. Strategic Decision Making: CLV helps businesses make informed decisions regarding customer acquisition, retention, and engagement strategies. By knowing the potential long-term value of customers, companies can allocate resources more effectively and prioritize efforts to maximize profitability.

  2. Customer Segmentation: CLV allows businesses to segment their customer base based on their value. By identifying high-value customers, companies can provide them with personalized experiences, loyalty rewards, and targeted marketing campaigns, fostering stronger relationships and maximizing revenue.

  3. Pricing Strategies: CLV helps businesses determine optimal pricing strategies. By calculating the lifetime value of customers, companies can set prices that reflect the value they provide, ensuring profitability while remaining competitive in the market.

  4. Forecasting and Planning: CLV helps businesses forecast future revenue and plan for growth. By understanding how much revenue can be expected from customers over their lifetime, companies can set realistic goals, allocate resources, and make strategic decisions to drive sustainable growth.

How to Use Customer Lifetime Value

To effectively utilize Customer Lifetime Value, follow these steps:

  1. Define the Timeframe: Determine the period over which you want to calculate CLV. It could be months, years, or any other relevant time unit based on your business model.

  2. Gather Data: Collect accurate and comprehensive data on customer behavior, purchasing patterns, average order value, customer retention rates, and associated costs over the chosen timeframe.

  3. Calculate the CLV: Use a CLV formula that best suits your business model. One common formula is: CLV = Average Order Value x Purchase Frequency x Average Customer Lifespan.

  4. Analyze and Segment: Analyze the calculated CLV values to segment customers based on their value to the business. Identify high-value customers who contribute significantly to revenue and focus on retaining and nurturing them.

  5. Implement Strategies: Tailor marketing, sales, and customer retention strategies to target high-value customers. Provide personalized experiences, loyalty programs, and incentives to increase customer satisfaction and loyalty, ultimately maximizing CLV.

Useful Tips

Consider these tips to enhance your understanding and utilization of Customer Lifetime Value:

  • Focus on Customer Retention: Retaining existing customers is often more cost-effective than acquiring new ones. By reducing churn rates and increasing customer loyalty, you can significantly impact CLV and overall profitability.

  • Invest in Customer Experience: Providing exceptional customer experiences throughout their journey can lead to higher CLV. Delight customers with personalized interactions, timely support, and valuable rewards to foster long-lasting relationships.

  • Continuous Monitoring: CLV is not a static metric. It evolves over time as customer behavior and market dynamics change. Regularly monitor and update CLV calculations to ensure the accuracy of your insights and decision-making processes.

  • Combine CLV with Other Metrics: To gain a holistic understanding of customer value, consider combining CLV with metrics such as Customer Acquisition Cost (CAC), Return on Investment (ROI), and Average Revenue Per User (ARPU).

FAQ

Customer Lifetime Value (CLV) is a metric used to determine the total revenue a customer is expected to generate over the duration of their relationship with a company.
Customer Lifetime Value is important because it helps businesses understand the long-term value of acquiring and retaining customers. It can assist in making informed decisions about marketing, sales, and customer retention strategies.
Customer Lifetime Value is calculated by multiplying the average purchase value by the average purchase frequency and multiplying the result by the average customer lifespan.
Several factors can influence Customer Lifetime Value, including customer satisfaction, loyalty, repeat purchases, average order value, and customer churn rate.
Businesses can increase Customer Lifetime Value by providing exceptional customer experiences, offering personalized recommendations, implementing loyalty programs, and focusing on customer retention strategies.
Customer Lifetime Value (CLV) measures the value a customer brings over their entire relationship with a company, while Customer Acquisition Cost (CAC) measures the cost of acquiring a new customer. CLV helps determine if the cost of acquiring customers is justified based on their long-term value.
No, Customer Lifetime Value cannot be negative. It represents the predicted revenue a customer will generate, and negative values are not applicable in this context.
Some limitations of using Customer Lifetime Value include the inability to accurately predict future customer behavior, variations in customer purchasing patterns, and the need for historical data to make accurate calculations.
Customer Lifetime Value can be used in marketing strategies by identifying high-value customers and tailoring marketing efforts to retain and upsell them. It can also help in allocating marketing budgets effectively by focusing on customers with higher CLV.
No, Customer Lifetime Value is not the same as revenue. Revenue represents the total amount of money generated from customer purchases, while Customer Lifetime Value takes into account the duration of the customer relationship and their potential future purchases.

Article by

Ruben Buijs

Ruben is the founder of ProductLift. I employ a decade of consulting experience from Ernst & Young to maximize clients' ROI on new Tech developments. I now help companies build better products

Table of contents

  1. Examples
  2. Importance
  3. How to Use Customer Lifetime Value
  4. Useful Tips
  5. Related Terms

Ship features your users (really) want.
Collect feedback, prioritize ideas, and build a product your customers love with AI-powered tools for feedback boards, roadmaps, changelogs, and knowledge bases.

Get Started for Free

The faster, easier way to capture user feedback at scale

Join over 3,051 product managers and see how easy it is to build products people love.

Did you know 80% of software features are rarely or never used? That's a lot of wasted effort.

SaaS software companies spend billions on unused features. Last year, it was $29.5 billion.

We saw this problem and decided to do something about it. Product teams needed a better way to decide what to build.

That's why we created ProductLift - to put all feedback in one place, helping teams easily see what features matter most.

In the last four years, we've helped over 3,051 product teams (like yours) double feature adoption and halve the costs. I'd love for you to give it a try.

Ruben Buijs

Founder & Digital Consultant