What do you actually earn on your customers? Get the answer right here.
Customer Lifetime Value (CLV) is a measurement of the profit earned from a customer over the entire relationship between the customer and the company.
CLV can be calculated for each individual customer, but it is more common to calculate an average CLV for, for example, a specific market segment, a selected target audience, or the buyers of a particular product.
An accurate calculation of and insight into your company's CLV is important because it is extremely useful in making decisions related to sales, marketing, customer support, etc. In fact, Forbes calls Customer Lifetime Value "The Only Metric That Matters" in an article from 2015.
CLV is important to know, for example, when the marketing department needs to determine how much the company should invest in acquiring new customers. This investment should, of course, be lower than CLV. If you want to take a closer look at where to focus your marketing dollars, CLV for selected target audiences can also be a useful tool.
Step by step guide - How to calculate Customer Lifetime Value
There are several ways to calculate CLV, but here we will use a relatively simple model that stands out for being quick and providing a reasonably accurate result.
Before you can calculate your CLV, you need the average values for:
- The cost of acquiring a new customer
- How much you earn from a customer each year
- The percentage of your customers who leave you each year (Customer Churn)
You can easily calculate the average "lifetime" of a customer when you know your Churn Rate. With a Churn Rate of 25%, for example, the average "lifetime" of your customers is 4 years (1 / 0.25).
Now you need to multiply your average customer lifetime with the average annual profit per customer and subtract the amount you spend to acquire a new customer. If, for example, it costs you 500 DKK to acquire a new customer and you earn an average of 1000 DKK per year per customer, the calculation is: 4 years times 1000 DKK per year minus 500 DKK, which gives a CLV of 3500 DKK.
If it seems overwhelming, you can try our Customer Lifetime Value calculator or download an Excel file that includes both the simple and a more advanced model. Download the file in the form on the right.
As the calculation shows, it makes sense to also focus on minimizing Customer Churn and improving Customer Retention. If you want inspiration on how to do this, you can read our post From Customer Churn to Customer Retention.