Danielle Dixon
Apr 22, 2025
We are all familiar with the saying – retaining customers is cheaper than acquiring them. However, the point that needs pondering is that not every customer contributes equally. Some, despite their tenure, drain resources more than they replenish them. The real question, then, isn’t just about keeping customers but strategically investing in the right customers.
Customer Lifetime Value (CLV) provides that strategic lens, quantifying a customer’s total worth over their entire relationship. It’s a bottom-line metric, unlike the often-lauded Net Promoter Score (NPS) or Customer Satisfaction Score (CSAT), which, while valuable indicators of sentiment, merely hint at future loyalty.
CLV, on the other hand, reveals tangible revenue impact, allowing you to calibrate Customer Experience (CX) investments for maximum ROI. More than that, it’s a powerful predictive tool, especially in long-term customer relationships, where a dip in CLV can signal impending attrition, a silent alarm bell for proactive intervention.
Simply put, CLV is the total revenue a business can reasonably expect from a single customer throughout their entire relationship—a holistic measure of a customer’s true worth. It’s the long game, a strategic perspective that transcends the immediate transaction. Imagine a customer who makes a one-time purchase of a $50 product versus one who consistently makes monthly $30 purchases for five years. The latter, despite smaller individual transactions, has a significantly higher CLV—a testament to the power of sustained engagement. Understanding this fundamental difference is critical. CLV allows businesses to escape the trap of short-term gains, the allure of quick wins, and instead focus on long-term customer retention, building a foundation for enduring success.
The world of CLV isn’t one-size-fits-all. Businesses employ various models to analyze and predict customer value, each with its own nuances and applications:
Interesting Read: Different Types of Loyalty Programs: Which Is Right for Your Brand?
Calculating CLV doesn’t have to be a complex, daunting task. Here’s a simplified, step-by-step approach:
1. Determine Your Average Order Value (AOV): Calculate the average amount customers spend per purchase, providing a baseline for understanding individual transaction value.
2. Calculate Your Average Purchase Frequency: Determine how often customers make purchases within a specific timeframe, revealing the rhythm of customer engagement.
3. Estimate Your Customer Value: Multiply AOV by purchase frequency, quantifying the immediate value a customer brings within a given period.
4. Estimate Your Average Customer Lifespan: Determine the average length of time a customer remains loyal, revealing the duration of their relationship with your brand.
5. Calculate Your Estimated LTV: Multiply customer value by customer lifespan. This provides a clear, actionable picture of the long-term value each customer brings, guiding strategic decisions.
The formula to calculate the ROI is just as simple in mathematical structure, yet different entirely. The purpose of calculating your ROI is to help you understand the efficiency of an investment, for example, you want to see how efficient your new loyalty rewards program is at increasing your revenue. Typically, this formula is a way for investors—and business owners like yourself—to determine whether they are receiving enough gain to continue investing.
ROI does not measure the total amount of revenue a business generates. ROI measures which metric generated the best “return.” Phew! That was a lot of groundwork, but it was necessary to lay it down so that you’ll have ease wrapping your head around the actual formula.
ROI = net profit ÷ cost of investment
Another simpler way of looking at it is this:
ROI = (current value of investment – cost of investment) ÷ cost of investment
Bear in mind that ROI is not a financial metric, but a percentage (a ratio) and it enables you to be rational in your investment decisions. The ROI will show you the percentage return of every financial effort you make. You will be able to see if your loyalty rewards program generates a 40% return or 60% return, and if your return here is higher than other marketing efforts, you can cut unnecessary spending and pour even more funds into the marketing method that works more.
The purpose of increasing loyalty and customer satisfaction is to increase the lifetime of a customer. How do you Calculate Customer Lifetime Value, or CLV? At the simplest level, CLV is essentially the length of time the customer patronizes your business versus the average amount a customer spends at your business during that same time frame.
CLV = (average monthly transactions × average order value) × average retention rate in months / number of clients for the period
Watch out! You’re not finished yet! The simple equation above will grossly overestimate the value of a customer because it ignores profit, costs, and the discount rate, all of which you’re going to want to include to make your calculations as accurate as possible. An improved formula would also multiply this figure by the average gross margin. With this new formula, you will be able to tell how much profit you make from a customer rather than how much a customer spends.
CLV = ((average monthly transactions × average order value) × average retention rate in months) × average gross margin / number of clients for the period
Customer lifetime value can greatly inform your return on investment, because CLV provides significant value when it comes to marketing ROI.
This is how you use the two resulting figures you’ve gotten from your ROI calculations and your CLV calculations to stay informed and make better business decisions. We’ll show you an example with real numbers:
Let’s assume you’ve calculated your average customer acquisition cost for your company and it’s $100, but the customer spends $180 so you have a CLV of $80 ($180 – $100 = $80).
In this example, the marketing ROI equation is CLV / acquisition cost = ROI (or) $80 ÷ $100 = 80%. In other words, your marketing department has taken $100 and turned it into $180 by acquiring a new customer, which is an 80% ROI.
Shifting focus from mere customer acquisition to cultivating long-term, profitable customer relationships is pivotal for sustained growth. Higher CLV translates to a healthier bottom line, a more resilient business. Consider the following:
Interesting Read: How to Pick the Best Customer Loyalty Program for Your Small Business
Loyalty programs are more than just points and discounts; they’re powerful tools for building lasting customer relationships and enhancing CLV. Consider these strategic approaches:
Interesting Read: Loyalty Programs: A Deep Dive into Traditional and Digital Approach
Loyal-n-Save is more than just loyalty software; it’s a strategic partner in maximizing CLV and driving long-term growth. Its comprehensive features include:
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Posted on Apr 22, 2025
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Danielle is a content writer at Loyal-n-Save. She specializes in writing about implementing loyalty solutions proven to help a company grow.
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