Customer Lifetime Value (CLV): What It Is, How to Calculate It, and How to Increase It

What is customer lifetime value (CLV)?

Customer lifetime value (CLV) is the total revenue a business can expect to earn from a single customer throughout the entire span of their relationship. This figure helps you predict future income, plan your marketing strategies, and focus on customer retention. Put simply, CLV shows you how much an average customer will spend with your brand before they stop buying from you. For example, if a customer spends $100 each year for five years, their lifetime value is $500.

CLV is more than just a number, it’s a window into the strength and value of your customer relationships. This helps you build a stronger understanding of how your customers impact your business and what you can do to better meet their needs.

CLV vs. LTV: What’s the difference?

Customer lifetime value (CLV) and lifetime value (LTV) are often used interchangeably. Both measure the value a customer brings to your business over time. However, they are different metrics. CLV refers to the value that an individual customer brings to your business. LTV refers to the value that all of your customers bring to your business. You’ll want to use both to gain a better understanding of your business’s strengths and weaknesses.

Why customer lifetime value matters

Customer lifetime value is more than just a useful metric—it’s a powerful tool for shaping your marketing plan, sales, and customer service strategies. Understanding CLV can help you prioritize your best customers, improve retention, and drive profitability. Below are the key reasons why CLV is essential, along with research-backed data on its business impact.

Make smarter marketing and sales budgets

When you know how much a customer is likely to spend over their lifetime, you can make better decisions about how much to invest in acquiring new customers. If your average CLV is $1,000, you might be willing to spend up to $300 or $400 to win a new customer, knowing you’ll earn that money back (and more) over time. This approach helps you avoid overspending on marketing and ensures your resources are used effectively.

Identify your most valuable customers

Not all customers contribute equally to your bottom line. By calculating CLV, you can segment customers into high-value and low-value groups. Doing so can help you streamline your operations by:

• Personalizing marketing strategies to each customer group
• Creating special incentives to drive purchases
• Creating loyalty programs to reward your best customers
• Improving retention rates

By targeting both high-value and low-value groups, you’ll be better equipped to meet demands while still signaling to your customers that you value their support, which can further reduce the risk of customer churn.

Develop retention strategies and product improvements

Focusing on CLV encourages you to look for ways to keep customers engaged and satisfied over the long haul. Research from the Wharton School shows that acquiring a new customer can cost five to seven times more than retaining an existing one. Even a small increase in retention, just 5%, can boost profits by 25% to 95%. 

When you know your CLV, you can justify investments in customer service, product enhancements, and loyalty programs.

Predict revenue and optimize resource allocation

Customers with higher lifetime value contribute to more stable, predictable revenue streams. This predictability makes it easier to plan for growth, manage cash flow, and forecast sales. When you use CLV to guide your business decisions, you’re investing in long-term success rather than chasing quick wins.

How to calculate customer lifetime value

To calculate customer lifetime value, you’ll need to use the CLV formula. The formula looks at the customer’s average purchase value, purchase frequency, and the number of years you expect them to do business with you. The formula looks like this:

CLV = Average purchase value × Purchase frequency × Customer lifespan

You’ll want to follow these steps to calculate each customer’s CLV. 

1. Find the average purchase value

To find the average purchase value for your customer, you’ll want to total up all of the revenue generated by purchases over their time supporting your company. Then, divide that total revenue by the number of purchases they’ve made.

2. Identify their purchase frequency

Once you have your customer’s purchase history in front of you, you’ll need to calculate their purchase frequency. For CLV calculations, the frequency refers to the total number of purchases made per year. 

If your customer makes purchases monthly, their purchase frequency is 12 purchases per year. If they purchase once every three months, their purchase frequency is four purchases per year.

3. Estimate your customer lifespan

Customer lifespan refers to the average number of years that a customer stays with your business. To find this number, you’ll want to consider how long your average customer stays with your business. If your customers have been with you since day one and you’ve been open for seven years, your average lifespan is seven years. If your repeat customers tend to stop purchasing from you after three years, your average customer lifespan is three years.

Look at the repeat transactions for most of your customers and see how long they continue to make them. Remember, this can and should be an estimate. 

Example of a CLV calculation

Say your customer has an average purchase value of $100, makes 12 purchases a year, and your average customer lifespan is eight years. Using the calculation, your CLV would look something like this:

CLV = $100 (Average purchase value) x 12 (Average purchase frequency) x 8 (Customer lifespan)

CLV = $9,600

Advanced CLV models

The standard CLV formula is just one option you can use for your business. For a more precise CLV calculation, which can be especially beneficial for businesses in SaaS or ecommerce, you can factor in gross margin and churn/retention rates. The formulas are listed below.

• Gross margin CLV formula: CLV = (Average purchase value × Purchase frequency × Customer lifespan) × Gross margin %
• Churn rate adjustment: In subscription businesses, use retention or churn rates to estimate how long customers stay. The formula is CLV = (Average revenue per customer x Gross margin) / Churn rate 
• Predictive CLV: These models use the standard CLV calculation but incorporate estimated values for future behavior to forecast future spending based on behavior to aid in long-term planning.

Common pitfalls in CLV calculation

Though calculating CLV can give you insight into how to improve marketing and ways to retain your existing customers, there are a few things you’ll want to keep in mind. When calculating CLV, be careful to avoid the following pitfalls.

• Not including referrals. Many businesses get new customers from referrals and word-of-mouth recommendations. Be sure to include those referred customers in your CLV calculation. This will give you a more holistic view of your customer behavior.
• Lumping all customers together. Your long-term customers will exhibit different purchase behaviors than your short-term customers. Be sure to calculate CLV for both types of customers by using clearly segmented data. This will help you target different groups more effectively.
• Overestimating customer lifespan. Overestimating customer lifespan can dramatically change your CLV results. When in doubt, be as accurate as possible and err on the side of underestimating lifespan. 

Factors that affect customer lifetime value

A variety of factors influence how much value a customer brings to your business over time. Recognizing these drivers helps you identify opportunities to increase CLV and build stronger relationships. Here are the most important factors to keep in mind.

• Retention and churn rates. How long customers stay with your business has a major impact on their lifetime value. High churn (customers leaving) lowers CLV, while strong retention increases it.
• Average purchase value and frequency. Customers who make larger, more frequent purchases contribute more to your bottom line. 
• Customer segmentation and lifetime stages. Not all customers are created equal. Segmenting your audience by behavior, demographics, or lifecycle stage allows you to target your efforts more effectively. You can use this data to improve your CLV for each target group. 
• Brand loyalty and customer experience. Customers who feel a strong connection to your brand are more likely to stay, spend more, and refer others.

How to increase customer lifetime value: Actionable strategies

Improving customer lifetime value is one of the most effective ways to boost your business’s profitability and resilience. Here are some strategies you can use to improve CLV.

Personalized marketing and segmentation

Personalized messages, offers, and recommendations drive higher engagement and repeat purchases. Identify your high-value customers and provide them with elevated customer service and special treatment when appropriate. Re-engage inactive customers with targeted messages through your newsletter or email marketing campaigns. 

Customer feedback and product improvement

Actively seeking and acting on feedback builds trust and ensures your products meet customer needs. Pay attention to online reviews and any customer feedback you receive. Keep doing the things that make your customers happy and address any concerns or complaints quickly. 

Doing so shows your customers that you value their support and want to make each experience a positive one.

Exceptional customer service

Consistent, proactive support keeps customers happy and loyal. Take a look at the quality of the customer service your clients receive. Ideally, your staff should take the time to identify each customer’s pain points and help them find the products they’re looking for. If your team is falling short, try to host training on ways they can improve the customer experience and better meet your customers’ needs. 

Cross-selling and upselling

Recommending related products or upgrades at the right time can boost transaction value. Encourage your employees to make recommendations on related products when appropriate. This can improve the customer experience while further helping to meet your customers’ needs. Just be sure to avoid being pushy. The recommendation should add value to the customer, not just your bottom line. 

Omnichannel experience

Offering seamless service across online, mobile, and in-person channels keeps customers engaged and increases convenience. Prioritize making your website easy to navigate and accessible to a variety of users. Make sure it’s optimized for mobile devices and tablets so customers can easily navigate your product pages regardless of the device they use. 

Customer retention programs and loyalty incentives

Formal programs encourage repeat business and reward loyalty. If you’re worried about customer loyalty, consider sending timely reminders or personalized offers by email to bring them back to your business. Offer discounts to customers who shop frequently or who spend over a certain dollar amount in a set time. 

Customer lifetime value examples 

Seeing how CLV works in different business models makes the concept more concrete. Let’s look at three examples: one in retail, one in SaaS, and one in a service-based business.

Example 1: Retail business

Average purchase: $40 | Purchase frequency: 5 times/year | Customer lifespan: 4 years

CLV Calculation:

$40 × 5 × 4 = $800

After calculating CLV, the retailer realized they could spend up to $150 on marketing to acquire each new customer. They also created a loyalty program to increase repeat purchases, which led to a higher average CLV the following year.

Example 2: Subscription/SaaS business

Average monthly subscription: $30 | Customer lifespan: 30 months | Gross margin: 80%

CLV Calculation:

($30 × 30) × 0.80 = $720

The SaaS company segmented users by engagement, offering personalized onboarding for new users. Churn dropped by 10%, and average CLV increased by $100, supporting more investment in customer support.

Example 3: Service-based business

Average project: $2,000 | Repeat rate: 1.5 projects/year | Customer lifespan: 3 years

CLV Calculation:

$2,000 × 1.5 × 3 = $9,000

The business realized that clients who attended their free webinars booked more repeat projects. They increased their webinar offerings, improving client retention and lifetime value.

How LegalZoom can help with customer lifetime value

Building a business with strong CLV requires a solid foundation and ongoing attention to your customer experience. LegalZoom can help entrepreneurs set up and manage businesses that are positioned for long-term success by helping with the following. 

• Business formation: Start your company with the right structure for growth. Form an LLC or establish a corporation to create a dedicated business entity that’s separate from you. 
• Compliance: Use our compliance concierge to make sure your business meets or exceeds your industry’s regulations and compliance standards. 
• Intellectual property protection: Safeguard your brand and customer trust by filing for a trademark.

By setting your business up right from the beginning, you’ll be better able to focus on delighting your customers and improving CLV for both short-term and long-term customers. 

Customer lifetime value FAQs

What is a good customer lifetime value?

A “good” CLV depends on your industry, product, and customer acquisition costs. In general, you want your CLV to be significantly higher than your acquisition cost. For many businesses, a CLV that is at least three times the CAC is considered healthy.

How does CLV differ by industry?

CLV varies widely by industry. Subscription and B2B service businesses typically see higher CLV than retail or one-time purchase models. Comparing your CLV to industry benchmarks can help set realistic goals.

How can I improve CLV for my small business?

You can increase CLV by improving customer retention, offering personalized experiences, upselling or cross-selling, and consistently delivering excellent service. Loyalty programs and proactive communication can also help.

How often should I recalculate CLV?

It’s best to review and update your CLV calculation at least once or twice a year, or whenever you launch new products, adjust pricing, or change your marketing strategy.

Can CLV include referrals and word-of-mouth value?

Yes. Some businesses choose to include estimated revenue from referrals generated by a loyal customer, especially if word-of-mouth is a significant acquisition channel.

Sandra Beckwith contributed to this article.