Unlock the power of CLV to reduce churn, cut acquisition costs, and turn one-time shoppers into long-term loyal customers.
According to Gartner, 25% of marketers rate customer lifetime value (CLV) among their top five most important marketing metrics. However, relegating CLV to the marketing team misses a potential opportunity for long-term sustainable growth.
Companies that understand and utilize CLV are able to reduce customer churn, lower customer acquisition costs, improve the customer experience, and build value from customer loyalty. It helps you to understand what’s working (and what’s not).
In this guide, we’ll go through the ins and outs of customer lifetime value: how to calculate it, what it can tell you, how to take action using CLV, and some ways of improving CLV over time. By the end of this article, you’ll have the tools you need to engage with the right customers and foster profitable, sustainable relationships.
Customer Lifetime Value (CLV) is a metric that represents the total revenue a business can expect from a customer over their entire relationship. The higher the CLV, the more valuable the customer; they’re likely to generate more revenue over time.
CLV is an important metric because it captures both revenue and customer loyalty. Use the customer lifetime value calculation as a starting point for a strong customer retention strategy. Influence offers the tools to help you maximize CLV right away. Set up a loyalty program with tiers, perks, and referral rewards to influence a shopper’s lifetime value. Influence’s highly effective rewards programs and personalization let you incentivize long-term shopping behaviors that lead to sustained business growth.
CLV also helps determine whether your customer acquisition costs (CAC) are sustainable.
Customer acquisition cost measures the total cost of bringing in a new customer. High customer acquisition costs can eat away at your profit margin, and comparing your CAC to your CLV can show you whether your expenses are sustainable or not.
To calculate CAC, divide the total cost of acquiring new customers by the number of customers acquired in a specific time period.
Using CLV and CAC together can help you assess if you’re spending money wisely.
Imagine your CAC is $100, and your CLV is $80. That means you’re spending $100 to bring in a customer that will only spend $80 throughout their relationship with your business. In this case, you're losing money with each new customer.
However, if your CAC is $100 and your CLV is $500, then spending that initial amount is justified.
Customer lifetime value also encourages smarter customer segmentation and, therefore, better personalization of marketing messages, loyalty incentives, and service design. A highly effective strategy is to segment customers based on CLV.
Rather than basing your rewards using demographic information, offer high-value perks to high-value customers using Influence’s Memberships tool. For instance, high CLV customers should receive VIP perks, exclusive deals, or loyalty rewards. Lower CLV customers may need more encouragement via personalized marketing or special offers to increase their value.
Interested in using CLV to segment your audience? Book a demo with Influence to get started!
Ultimately, a higher customer lifetime translates to higher profit. A high CLV indicates that your customer churn rate is low since customers continue to buy from your brand time after time. Customer retention translates to lower customer acquisition costs. A new customer can cost anywhere from five to 25 times more than keeping an existing one. Moreover, return customers spend 33% more than first-time customers.
CLV is an incredible driver for your business. Let’s dive into the two different approaches to this metric and how to calculate them.
There are two types of customer lifetime value: historical CLV and predictive CLV. Here’s a snapshot of these approaches.
Historical CLV calculates the total revenue a customer has generated in the past, assuming that historical patterns indicate future spending. Historical customer lifetime value is ideal for businesses that have stable purchasing patterns. For instance, a customer who purchases the same size Christmas tree every year will likely continue that pattern going forward.
Of course, the limitation of historical CLV is that a customer’s behavior could change. Using that same example, the customer could move or decide to celebrate Christmas elsewhere one year, disrupting their regular spending pattern. This CLV calculation is less accurate for businesses with fluctuating retention rates.
Predictive CLV estimates future customer revenue using churn rates, purchase frequency, and behavioral trends. This approach is better for businesses that rely on revenue forecasting, want to improve their personalization strategies, or have varying customer retention. However, it is a little more resource intensive. Calculating predictive CLV requires advanced data analytics, making it less accessible for startups and smaller brands.
Ready to calculate your CLV? Whichever approach you choose, follow the steps listed below to get a sense of how much each customer relationship is worth your business. If you’re struggling to get the data you need, Influence’s customer data tracking and analytics can help you get the input you need for both historical and predictive CLV calculations.
Remember, this method relies on past customer data to determine the revenue generated over a specific period. To start, you’ll need the following key metrics.
Average Order Value (AOV)
Purchase Frequency (F)
Customer Lifespan (L)
Historical CLV Formula:
CLV = AOV × Purchase Frequency × Customer Lifespan
Here’s an example of how this calculation works:
This number is useful when predictive data is unavailable and if you operate on a smaller budget and can’t spend resources on a more complex analytics tool. Bear in mind that it’s just an estimate; customer behavior isn’t always predictable.
This method estimates future revenue based on customer behavior trends, incorporating discounting for future earnings. It’s more accurate, especially for businesses in fast-paced industries or those that have the structure in place for data-driven decision-making.
In addition to the metrics used for the historical CLV calculation, you’ll need:
Customer Retention Rate (CRR)
Churn Rate
Discount Rate
Predictive CLV Formula:
Predictive CLV = Σ (Revenue per period ÷ (1 + Discount Rate)ⁿ)
Here’s how this formula works in practice.
Clearly, this is the more complicated way to calculate customer lifetime value. It’s most useful for companies with longer customer relationships or subscription models, SaaS, or data-driven decision-making.
CLV is considered a core metric for every business, one that’s useful in just about everything from pricing to marketing to customer service. However, there are some common miscalculations related to CLV that can lead to poor business decisions.
It’s crucial to have a solid understanding of how to use CLV to avoid the pitfalls of these common mistakes.
Some business owners assume customers will stay active longer than they do, inflating CLV estimates. Unfortunately, this can lead to overspending on customer acquisition.
How to avoid this pitfall: Predictive CLV includes customer churn rate, which can give you a more realistic customer lifespan. If you have it available, factor in customer retention data to your calculation. This information will give you a more accurate estimate that you can use to improve your CAC and loyalty tiers.
Leaving out churn rate or miscalculating it as part of your CLV calculation is a key error. Churn rate directly impacts your customer lifetime value. A high churn rate ultimately means lower long-term revenue. It means customers shop with you once or twice but won’t return thereafter. Businesses that overlook this dynamic risk inaccurate financial planning.
How to avoid this pitfall: Always factor in churn rate when estimating a customer’s lifespan. You can calculate churn rate by taking your monthly recurring revenue at the beginning of the month and dividing it by the monthly recurring revenue you lost by the end of the month.
Treating all customers the same can discourage some shoppers from returning. A one-size-fits-all approach to CLV can leave big-ticket spenders feeling undervalued and under-appreciated. They may leave your brand for a competitor who provides perks relevant to their estimated CLV.
How to avoid this pitfall: Use Influence’s tools to segment customers more intelligently. Group shoppers based on their CLV and personalize engagement strategies with highly relevant rewards and perks. Tiered loyalty programs are a great way to master this strategy.
Customer lifetime value is somewhat of a moving target. Market trends and competition can cause CLV to fluctuate as customers are lured away by attractive competitor pricing, market shifts, or economic downturns. Businesses that fail to see CLV as fluid will fail to adapt and may see unexpected drops in CLV.
How to avoid this pitfall: Regularly track CLV trends for your industry to benchmark your business performance. Research from firms like Gartner, Forrester, and Statista can give you information on your specific market–and it’s important that you measure against businesses like yours.
Knowing your CLV is not enough. You must apply it to your decision-making across the business. Low CLV can indicate that your pricing, customer experience, or marketing needs to change. A high CLV can give you feedback on what’s working and help you apply strategies to other customer segments.
How to avoid this pitfall: Update your CLV calculation regularly. Even when your CLV looks healthy, remember that things can change. Monitoring your data will help you make better decisions and continue to provide the type of brand experience that delivers on your predicted customer lifetime value.
Customer lifetime value shows you how much to invest in your customer experience to generate a positive ROI. “Customer experience” is a broad term, however, so let’s unpack some concrete examples of how to implement CLV in your marketing, pricing, and financial planning.
CLV can indicate when to allocate more (or less) of your budget to customer acquisition. If a customer is expected to generate a lot of revenue over time, then you can afford to spend more upfront to encourage them to buy. However, customers who do not generate significant long-term value indicate you should keep acquisition costs low to maintain profitability.
Luxury brands, SaaS companies with high retention rates, and subscription services often invest more in paid marketing, personalized outreach, and brand building. These types of companies know their customers tend to have higher CLV, and can therefore justify the higher upfront marketing costs.
CLV can also help your business find the right balance between customer acquisition and customer retention. Where you focus depends whether your business has a high CLV or a low CLV.
For brands with low customer lifetime value, it’s best to create a strategy that brings in as many customers as possible at a low cost. In this scenario, your individual customers aren’t making repeat purchases; retention efforts won’t be as impactful. This dynamic is typical for low margin e-commerce retailers, consumer goods, and budget airlines, for instance.
Brands with low CLV should focus on strategies to acquire customers at scale, such as:
For brands with high CLV, retaining existing customers is more valuable than constantly acquiring new ones. These businesses benefit from marketing strategies such as:
Understanding where your CLV stands can help you design the right mix of customer retention and acquisition strategies.
Your CLV can also inform your pricing strategy. Use your customer lifetime value calculation to ensure your pricing aligns with long-term profitability and keeps customers satisfied.
Companies that have high CLV are able to leverage premium pricing. Customers see the long-term value in your brand and are less likely to be impacted by a high price tag. Additionally, setting a premium price communicates exclusivity; your brand can offer white-gloved customer service, loyalty perks, and luxe experiences to reinforce this experience. Apple is a great example of a brand that increases CLV and maintains high pricing simultaneously.
Subscription models also rely heavily on CLV to make pricing decisions. Often, a subscription service will set a lower initial price (such as a free trial) to encourage users to sign up. This increases acquisition and long-term retention. However, without knowing CLV, these free trials can end up damaging profitability.
For instance, Netflix offers tiered pricing to maximize revenue per customer while ensuring affordability at different commitment levels.
Bundling is a powerful pricing strategy that boosts Average Order Value (AOV) and customer retention, ultimately increasing CLV. By packaging multiple items together, businesses encourage customers to spend more per purchase. For instance, many fast food restaurants create meal combos that increase AOV compared to selling items individually.
CLV gives you a more strategic way to create customer segments and personalize your outreach to distinct groups. Use customer lifetime value to classify customers into high-value and low-value groups. This segmentation helps maximize revenue by investing more in high-value customers while optimizing engagement efforts for lower-value customers.
Customers with high CLV are loyal, frequent buyers - and should be treated as VIPs. They significantly boost your business’s revenue, warranting additional budget in the form of premium rewards and perks. Create a satisfying customer experience for this group by offering priority support, exclusive discounts and rewards in your loyalty program, special deals based on purchase history, dedicated account managers, or concierge services.
For inspiration, consider how airlines treat their high CLV travelers: frequent flyers and business travelers who have elite status. Airlines offer this group priority boarding, lounge access, seat upgrades, and more. Investing in these customers benefits the airline in the long run, since they generate consistent revenue from high CLV travelers.
Low CLV customers matter too; don’t ignore this group entirely. Instead of offering costly perks, find ways to increase these shoppers’ value over time. Returning to the airline example, low CLV travelers get basic rewards (such as earning miles or points for future flights) but are more likely to receive promotional fares, credit card incentives, and special discounts to encourage future travel.
Finally, customer lifetime value can help your business predict future revenue and adjust your strategy accordingly.
You can accomplish a number of forward-looking goals with a solid understanding of how much revenue the average customer generates over time. Tracking CLV over time can give you the confidence to adjust your acquisition and retention strategies. If your CLV is strong, continue investing in acquisition; if your CLV declines, shift your focus to customer retention.
Likewise, a dropping customer lifetime value can signal that your customer experience is flawed or your pricing is off. Dig into your metrics to pinpoint where you need to course correct.
Clearly, CLV plays a role in many key business decisions. And, companies that command high CLV have a distinct competitive advantage. So, how can you boost your customer lifetime value? Here are a few strategies to try.
Customer retention is like a silver bullet for all your business problems. It’s the most cost-effective way to grow: research shows that just increasing customer retention rates by 5% will increase profits by 25% to 95%.
There are many ways to increase customer retention. Start by being proactive about your customer service. Solve issues for your customers before they abandon your brand. Customer churn can also be managed with rewards and loyalty features. Influence’s powerful loyalty programs help you keep your customers engaged through personalized rewards, VIP perks, and exclusive discounts, which significantly improve retention rates.
Read more: Learn How To Build Effective Loyalty Programs With The 8 C's of Customer Loyalty
Loyalty programs are also helpful in driving repeat purchases. Tools like Influence’s StampCard give customers digital stamps for repeat purchases, motivating engagement and creating an easy avenue for bringing more customers into a formal loyalty program. Customize the reward parameter (i.e., 5 stamps = 1 coffee) and choose from commonly used reward strategies to drive results.
For more advanced ways of encouraging repeat purchases, try Influence’s loyalty tiers. Tiered loyalty programs give participants different levels of benefits based on their spending and activity. As customers spend more or engage more frequently, they move up through the tiers, unlocking better rewards at each level. Tiers are psychologically motivating to shoppers who engage regularly, earning rewards for frequent, repeat purchases - and increasing their CLV in the process.
Another easy way to improve CLV is to use email marketing and personalized product recommendations to regularly engage customer segments.
SHEKO, a line of meal replacement shakes and supplements, partnered with Influence to lower customer acquisition costs using referrals. SHEKO sent registered customers their own personal referral links, which they can then forward to their friends and family. Once the link is opened (and an email address entered), the new customer receives a €10 voucher that they can redeem against any SHEKO purchase made within two months that meets the minimum spend requirement.
This tactic leverages the trust and personal connections of existing customers. What makes it so successful is that everyone wins: The new customer gets introduced to products they’re likely to enjoy, the existing customer gets rewarded for their recommendation, and SHEKO gets both new customers and long term loyalty for minimal spend. The best part? CLV rises, too.
“We’re still testing how we can improve the number of referrals that we get from our customers. Right now we’re receiving about 20 referrals a month. Without the acquisition costs, our CLV on these referred customers is at least double as high as the CLV on a normal customer,” - Idris Farjad, SHEKO’s CRM Manager.
“A loyalty program can help us to retain customers & increase CLTV. By offering rewards & incentives for repeat business, our customers are more likely to choose our brand over competitors, increasing revenue & loyalty.”
Businesses can leverage upselling, cross-selling, and bundling to maximize customer lifetime value (CLV) by increasing the amount customers spend per purchase and encouraging repeat business. These strategies drive higher Average Order Value (AOV) and strengthen customer loyalty.
Upselling and cross-selling persuade customers to buy a more expensive version of a product with enhanced features or benefits. Your business can recommend complementary products/ bundles, such as a phone case with a phone. This increases total order value by adding useful extras.
These strategies, when done well, also enhance the customer experience. But that’s not the only way to keep your customers coming back for more. Start with personalized shopping experiences, such as recommendations based on past purchases. Send follow-up emails after checkout to gather feedback and incentivize future purchases with small discounts.
Fast, helpful customer support is essential. Provide many easy ways for customers to get in touch, such as live chat, chatbots, and self-return portals. For example, Zappos is known for legendary customer service, offering free shipping, easy returns, and friendly support, resulting in strong brand loyalty.
Bottom line: When customers feel valued beyond their initial purchase, they are more likely to become loyal, long-term buyers.
Customer lifetime value is a powerful indicator of business health. Tracking this metric over time can help you make decisions about customer acquisition, pricing, retention, and loyalty tactics - ultimately driving better business performance.
Regularly calculate CLV to refine your marketing strategy, adjust pricing and maximize revenue, and improve your customer retention. CLV plays a pivotal role in creating and growing your loyalty program. And, with the right tools, you can improve your ROI and build the kind of long-term growth that all business owners dream of.
Ready to boost your CLV and drive long-term business growth? Explore how Influence’s loyalty and rewards platform can help you retain customers and maximize lifetime value. Get started today with a free demo!