When you know how to calculate customer lifetime value (CLV), you will have survival skills.
Think about the last few years. Businesses have seen a huge demand for really personal experiences. Customers expect to connect with you smoothly, no matter where they are. This has made CLV a must-have for smart business decisions. Plus, getting new customers costs more now. So, focusing on the value of your current customers is key for steady growth.
At Nexalab, we see many businesses struggle with this CLV. Customer data is often scattered everywhere. And yes, getting a clear picture for an accurate CLV assessment is challenging. So, we help those businesses. Our expertise lies in making sense of these scattered details for a practical CLV calculation. And in this guide, we show you the steps.
What is Customer Lifetime Value?
Customer Lifetime Value (CLV) is the total profit a business expects from a customer. This isn’t just about one sale. It covers their entire relationship with your company. It’s a forward-looking guess of what a customer is worth over time.
For a clear customer lifetime value example, imagine someone subscribes to your service. They pay $30 a month for four years. Their CLV would be $1440, before you subtract acquisition and service costs.
Based on that customer behaviour, typically, CLV blends three things:
- How much does a customer spend?
- How often do they buy?
- How long do they stay?
Combining these three factors gives you a complete picture of your customer’s long-term value. So, knowing CLV in marketing, sales, and customer service helps you spot your most valuable customers. With that insight, you can start connecting the dots.
Let’s say your data shows customers nurtured through a strong brand loyalty program tend to buy add-ons more often than those acquired via paid campaigns. That’s not just interesting; it’s actionable. It means your marketing dollars could go further if they’re spent on retention rather than re-acquisition.
And it doesn’t stop there. These CLV patterns don’t just shape how you market. They inform you how to sell and how to serve. When you know what keeps your best customers coming back, you can focus on what matters most: keeping them happy and around.
How to Calculate Customer Lifetime Value
Calculating customer lifetime value is simpler than it sounds. To calculate CLV, you’ll need:
- Average Purchase Value
- Purchase Frequency
- Average Customer Lifespan
Here’s the basic customer lifetime value formula:
CLV = Average Purchase ValuePurchase FrequencyCustomer Lifespan
This foundational CLV figure gives you a snapshot of potential revenue from each customer. While advanced tools use predictive analytics and segmentation, this simple version works well for most businesses getting started. From here, let’s walk through each step to help you apply it to your own data.
Determine the Average Purchase Value
The first step in your clv calculation is finding the Average Purchase Value (APV). The purpose of APV is to see how much a customer typically spends in one go. This gives you a baseline for what each transaction is worth. It’s a good look at how much customers spend each time they buy from you. The formula for APV is quite simple:
Average Purchase Value (APV)=Total RevenueTotal Number of Purchases
Let’s say your business made $100,000 from 2,000 purchases last year. Your APV would be $50. Understanding this number helps you gauge the effectiveness of your pricing and how much value is tied to each sale.
Calculate Purchase Frequency (PF)
Now, you need to calculate the Purchase Frequency (PF). The point of PF is to know how often an average customer buys from you. This could be over a month or a year. This metric is key for understanding customer loyalty. It shows repeat business patterns and overall engagement. The formula for PF looks like this:
Purchase Frequency (PF)= Total Number of PurchasesNumber of Unique Customers
Using our earlier example, if 500 unique customers made those 2,000 purchases: Your PF is four purchases per customer per year. Purchase Frequency directly tells you about customer engagement. It shows how much they like what you offer.
Measure Customer Lifespan (ACL)
The third piece to calculate customer lifespan is the Average Customer Lifespan (ACL). The goal here is to estimate how long a customer keeps buying from you. This really affects long-term value. Your retention rate plays a big part here. Understanding your average customer lifespan adds a time element to customer value. One common way to figure out ACL, especially if you track churn, is:
Average Customer Lifespan (ACL)= 1Churn Rate
If your annual churn rate is 20% (or 0.20), your ACL is 5 years. ACL can also come from looking at historical data for active years. This duration is heavily shaped by the overall journey, which is often best viewed through a detailed customer experience dashboard.
Apply the Basic CLV Formula
Now you have the Average Purchase Value, Purchase Frequency, and Average Customer Lifespan. It’s time to use the basic customer lifetime value formula. The idea is to combine these metrics into an initial estimate. This estimate shows the total revenue an average customer might bring over their entire relationship. It puts a tangible value on them. As mentioned above, here’s the basic customer lifetime value formula:
CLV = Average Purchase ValuePurchase FrequencyCustomer Lifespan
Using our examples, CLV = $50 (APV) × 4 (PF) × 5 years (ACL) = $1,000. This suggests that each customer could be worth $1,000 in revenue. Some businesses refine this using profit margins to examine profitability more closely.
Track, Monitor, and Segment CLV
Calculating CLV once gives you a snapshot, but real value comes from tracking it over time. Because CLV reflects changes in customer behaviour and market conditions. It also shows if your business strategies are working. Regular monitoring helps you spot trends.
Then, you need to segment CLV into different customer groups to give richer insights. Segmenting CLV by product line, acquisition channel, or customer demographic. This reveals what works and what doesn’t. So you can optimise campaigns and budgets more confidently.
But here’s the hurdle: siloed data. CLV accuracy suffers if your CRM, email tools, and sales platforms don’t talk to each other.
That’s where Nexalab’s CRM integration service can help you centralize customer interaction and transaction data. Our CRM integration services connect your tools, from marketing automation, e-commerce platforms, email systems, and other tools. All of these are combined into one single dashboard. This makes segmentation easier and CLV more accurate.
Your Next Step
Learning how to calculate customer lifetime value is just the beginning. Because your CLV accuracy depends on having a clean and connected view of all your customer interactions. That’s why integrated systems make calculating CLV faster, more accurate, and more impactful.
So if you’re ready to stop guessing and start making smarter decisions, we’re here to help. Book a free discussion session with our team now. And let’s centralize customer interaction and transaction data today.
