Customer Lifetime Value

What is Customer Lifetime Value (CLV)?

Customer lifetime value's the total revenue a business can expect from a single customer throughout their entire relationship. 

It measures the long-term financial worth of an account instead of just looking at the initial order. For example, if a subscriber pays $30 a month for a box subscription and stays active for two years, their individual lifetime value is $720.

Why does Customer Lifetime Value matter?

Tracking customer lifetime value tells you exactly how much you can afford to spend on acquiring new customers.

This is important to ensure you don’t overspend on marketing channels that lose money. It also shows you which customer segments bring in the highest profits over time, so you can focus your acquisition efforts on ideal buyers.

Improving this metric also helps you grow revenue without relying entirely on paid ads, because keeping existing customers active brings higher returns than constantly hunting for new signups.

How do you calculate Customer Lifetime Value?

You calculate customer lifetime value by taking your average order value, multiplying it by purchase frequency, and then multiplying that result by average customer lifespan.

The basic formula follows this format:

(Average Order Value x Purchase Frequency) x Average Customer Lifespan = Customer Lifetime Value

For example, let's say your average order value's $50, your customers buy 4 times a year and your average customer stays for 3 years. You multiply 50 by 4 to get $200 in annual spend — and then you multiply 200 by 3, which leaves you with a customer lifetime value of $600.

If you run a subscription service, you can also use a simplified version of this calculation:

Average Monthly Revenue Per User / Monthly Churn Rate = Customer Lifetime Value

For instance, if your average subscriber pays $40 a month and your monthly churn rate is 5% — you divide 40 by 0.05, which gives you a lifetime value of $800.