What is Customer Lifetime Value?
Customer Lifetime Value is a metric that projects the amount of money a customer will spend with your company over the entire time that they will do business with you. Every business owner knows that it’s cheaper to keep an existing customer than it is to acquire a new customer, but they don’t know how much cheaper. That amount will vary depending on your customers and your business, so it takes some calculation. Fortunately, Klaviyo makes it easy to track and understand all of your important business metrics, and we tie everything back to the metric you care most about: revenue.
What is the difference between CLV and LTV?
Nothing! CLV and LTV are the exact same thing, just with different acronyms. Whether you prefer to use LTV (Lifetime Value), or CLV (Customer Lifetime Value), or LCV (Lifetime Customer Value) is completely up to you. We’ll be referring to these as CLV in this post, but rest assured, they’re all the same thing.
Why is Customer Lifetime Value important?
Customer Lifetime Value is an important metric to track because it can help you make business decisions around your marketing and sales budgets. If you know how much money you can expect to earn from the average customer, you can make a more informed decision about how much time and money to spend on marketing channels to acquire them. Klaviyo has built-in tools to help you calculate revenue and CLV, as well as CLV tools including predictive CLV (powered by AI), probability of churn, and more. You can also use our calculators below to get a better idea of what your CLV is.
Customer Lifetime Value Example
Imagine you run an ecommerce store selling water bottles stamped with fake quotes from famous individuals.
“The problem with quotes found on the internet is that they are often not true.”
“Do or do not, there is no try.”
Each water bottle you sell costs $5 for you to make, and you sell them for $20. Last year, you sold 2,500 water bottles, which equaled $50,000 in gross revenue, for a nice profit of $37,500. Of the 2,500 water bottles sold, 1,500 a one-time sale. The remaining 1,000 were from repeat purchases.
Our first key customer metric is average customer purchase frequency. If there are 2,500 orders and 1,500 unique customers, the average customer purchase frequency is 2,500 divided by 1,500, or 1.66. In other words, you can predict that a typical customer will buy 1.66 water bottles. Multiply that by the average purchase price of $20, and you have a CLV of $33.33.
Now that you know that, on average, you can expect to earn $33.33 over the lifetime of a customer, you can make much more informed decisions on how to go about acquiring new customers. For example, you would want to cut any marketing channels that meet or exceed $33.33.
More Considerations for CLV
You now know the basics of calculating CLV! A good next step would be to create various customer segments, based on products they buy, how they found you, and how frequently they purchase.
The first segment you should build is based on how they found you. This can help you to identify channels that may have a higher CLV than others. Let’s look at another example:
Segment A: All of your Adwords Customers
Total Adwords Customers: 500
Average order value: $20
Average purchase frequency: 1.89
CLV Calculation based on average CLV: $37.8
CLV Calculated using Klaviyo’s AI Model: $35.56
Note: AI Model will be more accurate than any of these calculations based on averages. Klaviyo’s AI model combines learnings about the individual behavior as well as overall customer trends.
Avg CPL: $10
Net CLV: $27.8
Segment B: All of your Facebook Customers
Total Facebook Customers: 300
Average order value: $20
Average purchase frequency: 1.55
CLV calculation based on average: $31
CLV Calculated using Klaviyo’s AI Model: $32.65
Avg CPL: $8
Net CLV: $23
In this example, if you were looking strictly at Cost Per Lead (CPL), you may determine that you get more bang for your buck with Facebook, and may have chosen to allocate more of your marketing budget in this channel. However, after looking at CLV, you realize that your Adwords customers tend to purchase more frequently and thus are worth more to your business in the long run.
How to calculate CLV
There are several ways to calculate CLV, and we’ve provided a couple of calculators to assist you in easily determining what your CLV is based on the data you have available.
Simple CLV Calculator
Your customer lifetime value is:
Annual Customer Lifetime Value
Your customer lifetime value is:
Customer Lifetime Value (complex)
Your average purchase value is:
Your average purchase frequency rate is:
Your average customer lifetime value is:
Your CLV is:
How to improve CLV
There are many levers you can pull when trying to improve CLV. These include:
- Increase the average purchase value
- Increase the frequency of customer purchases
- Increase the total number of customers you have
It’s important to note that CLV/LTV should not exist in a vacuum. It’s extremely important to factor in your customer acquisition costs (CAC) as well, to paint a holistic picture of how much your customer segments are worth.
Whether you decide to focus on retention by improving customer satisfaction or increasing the average purchase value by offering various discounts, coupons, and incentives, Klaviyo has all of the tools you need to get a better understanding of your customers and communicate with them on a more personalized level.
Book a demo to learn more about Klaviyo’s features and why we’ve helped over 15,000 of our customers grow better. Customers who switch to Klaviyo see an average increase of 29% of their sales within 6 months.Back to Blog Home