Customer Lifetime Value Calculator

What Is Customer Lifetime Value

Customer lifetime value (CLV, or CLTV) is a metric that tells you the total value of a customer to your business.

It takes into account how much they spend, how much they cost to serve, how long they buy from you and how much they cost to acquire.

The longer a customer buys from you, the more valuable they are to your business and the greater their customer lifetime value becomes.

This is the most important growth metric you can know about your business. Understanding it and knowing how to use it couldn’t be more important for business owners and founders.

Why Is Customer Lifetime Value Important

1. It helps you create profitable marketing campaigns

You need to know your CLV to be able to create profitable marketing campaigns.

You want to acquire new customers for less than their CLV so your marketing is profitable. If you spend more to acquire a new customer than what they are worth, eventually you’ll go broke.

The more profit you can make from each marketing campaign, the faster you can grow your business.

2. Increasing CLV will increase your revenue

By tracking the CLV of your customers over time you’ll be able to see if your marketing, sales and customer service efforts are becoming more or less effective.

When you make improvements to either of these three aspects in your business your CLV will increase which will lead to increased revenue for your business.

So you can directly track the effectiveness of our customer teams and predict whether they are helping you grow your business by tracking you CLV.

3. CLV will help you find your most profitable customers

If you’ve heard of Pareto’s law you’ll know that not all customers are the same.

In most businesses, a small percentage of customers produce most of the business’s profits.

By calculating and tracking CLV of different customer segments you can find your most valuable group of customers and tailor your sales and marketing efforts toward these people.

4. Tracking CLV will help you identify business issues

By paying attention to your CLV over time you can spot trends in your business.

If your CLV starts decreasing then you can use this knowledge to identify problems in your business.

Perhaps you’ve hired a bad customer service rep, or the latest version of your software is full of bugs.

Decreasing CLV is a good indicator of business problems.

How To Calculate Customer Lifetime Value

We haven’t found a single resource online that gets this calculation right. It’s really important to understand that customer lifetime value when calculated correctly should be a net value, not a gross value.

Meaning you should account for the costs of acquiring and serving your customers. If you don’t using an incorrect number can lead you to some scary outcomes. Companies have gone out of business for lesser mistakes.

So here’s the full customer lifetime value calculation:

= ((Average Purchase Value x Customer Lifespan) x Gross Margin) – CAC – Marginal Costs

We’ll break down each part of this calculation below.

Average Purchase Value

Average purchase value is the average amount a customer spends with you each time they make a purchase.

For SaaS companies, gyms and other businesses that charge customers a fixed recurring amount. The average purchase value is just the average subscription amount across all your customers.

For retail companies, where the purchase amount varies. You can want to add all your sales for a given period, like a month and divide it by the total number of sales during that period.

You can see on our customer lifetime value calculator above how this work. That’s why we’ve given you the option to choose between a retail calculation and a subscription calculation.

Customer Lifespan

Customer Lifespan is the total length of time that a customer buys from you. This can be anywhere from a few days (someone on holiday) to 50 years (a local who always buys from the same supermarket).

To calculate how long your average customer shops with you, you can use the formula (1/churn).

So first we’ll explain churn then get back to customer lifespan.

Churn

This number measures the percentage of customers who ‘left’ your business over a specific period.

It gets a little tricky to measure churn for businesses who sell stuff in-frequently, like say a dentist whose patients only go for a checkup every 2 years.

So when you’re measuring churn it’s important you choose the right period of time for your business. Two years might be the right amount of time for a Dentist, while three months was fine for our hair salon.

The formula is: (Customers lost)/(Total Customers At Start Of The Period) = Percentage of customers lost for that period = Churn.

Now getting back to Customer Lifespan remember the formula is (1/churn). So if a business has a monthly churn rate of 5%, then the customer lifespan of that business is 20 months.

Gross Margin

The calculation for Gross Profit Margin is (Revenue – Cost Of Goods Sold)/Revenue. As you can see by the formula, your gross margin is the percentage of sales revenue left over after accounting for your cost of goods sold, such as stock.

For example, if you sell a jacket for $100, and it costs you $60 to purchase. Then your gross profit margin is 40%. I.e. (100-40)/100.

CAC

Customer Acquisition Cost or CAC is how much you’re paying to acquire a new customer. Which is generally what you’re spending on marketing and sales to get each new customer.

So the formula is: CAC = (Marketing + Sales)/New Customers -> over a given period of time.

When you’re making this calculation you need to make sure you keep your time horizon the same for both your costs (marketing and sales) and the number of customers you’ve acquired.

Marginal Costs

These are the extra expenses your business pays to serve an extra customer.

We need to account for these because after you’ve acquired your new customer. You’ve got to serve that customer, which costs money.

Take staff wages, for example The more customers you have, the more staff you’ll need. Or your power bill, where more customers typically mean more equipment, air conditioners, etc.

Customer Lifetime Value Example

Let’s use a business we own and know well as an example (a local gym) to walk through these calculations.

Calculate the average customer lifespan

First, we need to know the average lifespan of a member at the gym.

At the moment they have 540 members and about 29 leave the gym each month.

So the churn rate at the gym is 29/540 = .0537 or 5.37%.

We know the average customer lifespan calculation is (1/churn rate) so the customer lifespan of a gym member is 1/.0537 = 18.62 or 18.62 months.

Calculate the average order value

I know the average membership value (average purchase value) is $77 per month. I worked this out by adding up the total membership revenue for a month at the gym and divided by the total number of paying members. i.e. $35,805/465=77.

Account for costs of serving the customer

The gross profit margin at the gym is 80% – which I can find in our accounting software or calculate manually.

The cost of acquisition per member is $87.33, which is our total marketing and sales spend divided by the total number of new customers we acquired in a month.

And finally, our marginal cost per member is ~$700. Which are all the extra costs the gym will incur to serve that member over the whole time they train at the gym which is 18.62 months on average.

Calculate the customer lifetime value

Now we have all the information we need to complete the full calculation like below.

((Average Purchase Value x Customer Lifespan) x Gross Margin) – CAC – Marginal Costs

Average Purchcase Value = $77 per month

Customer Lifespan = 18.62 Months

Gross Profit Margin = 80.51%

CAC = $87.33

Marginal Costs = $700

((77 x 18.62) x .8051) – 87.33 – 700 = $366.97

If you want to check our math – put these numbers into our customer lifetime value calculator at the top of this page and see what the answer is.

How To Increase Customer Lifetime Value

So now you know what customer lifetime value is, why it matters and how to calculate it. The last piece of the puzzle is increasing it. The best way to do that is by signing up for our free email course here.

Here’s a little taste of what we share in the course – these suggestions will get you some quick wins.

Drive Referrals

Referred customers are almost always cheaper to acquire and spend more money. Why? because the friends and family that drove them to your business have already self-selected the customer for you. You’re not going to recommend something you know your mates won’t like, are you?

So increasing referrals will reduce your CAC and increase your average order value which is a big boost for customer lifetime value.

The trick to driving more referrals is incentivising your customers to do so. Don’t rely on their memory and goodwill. Give them a reason to remember, give them a reason to talk about you.

And better yet – make sure the referred customer gets a wee bonus to. I like to give the current customer and the referred customer the same discount or freebie.

Onboarding

The longer you can keep a customer the more likely they’ll stay your customer.

If you look at your numbers closely you’ll see you lose most of your customers within the first few days, weeks or months. And generally, the main reason these customers leave is they had a poor onboarding experience.

Getting a sale is only half the job. You also want to make sure the customer gets the result they think they’re paying for.

It’s your job to find out that result and work hard to make sure they get it as soon as possible. If you do that well, they’ll keep coming back.

Marketing

Your CAC i.e. how much you’re spending to acquire a new customer can make or break a marketing campaign. You have to be able to get new customers below their customer lifetime value. If you can’t your business is terminal.

You can drive down CAC by improving your offer. Make the offer in your marketing campaigns hard to ignore. We’ve shared the framework we use to do this here – just copy it step by step and we guarantee your CAC will decrease.

Sales

So you know that increasing your average order value will increase your customer lifetime value. So add a simple upsell or cross-sell to your sales process.

Bolt on an extra product or service to your sales process that costs little to provide and has a good margin.

At our gym, this looks like protein bars and other snacks that we sell to members every time they come to train. On a good week, retail adds an extra 5% to our topline.

Over our member’s customer lifespan that equates to an extra $50 in LTV – a 15% increase.

The Benefits Of Customer Lifetime Value

Customer lifetime value might be the most important metric in your business. It tells you how much each customer is worth to your business and shows you what areas of your business you need to improve to increase that value.

We hope with our calculator and explanations above you can start making better business decisions to drive growth.