Learn How to Calculate Your Customer Lifetime Value

If you are a business owner trying to scale, data is the most important tool to make the best decisions. Customer Lifetime Value (CLV) is an essential data point that any business should know, understand, and track over time.

What is Customer Lifetime Value (CLV)?

Customer Lifetime Value (CLV) is a measure of how valuable a customer is to your business over time. It takes into account both the customers first purchase and any ongoing purchases they make throughout their entire relationship with your business.

To determine the true worth of the customer, it also subtracts out the cost of providing your product or service, as well as customer acquisition cost.

The CLV will vary for every business and it is not always a straight-forward calculation, depending on how detailed you would like to be. The basic calculation for CLV is:

CLV = Initial fees + Ongoing yearly fees x Average lifespan of customer – Costs of providing service – Customer acquisition cost

Example CLV Calculation

Let’s say you are a financial planner who charges a flat $500 setup fee for new accounts and then 1% of the annual portfolio value going forward. For an average-sized $100,000 portfolio, that would equal $1,000 in revenue every year, without taking into account growth of the portfolio.

The ongoing costs associated with providing your financial planning services to your client is $150 per year. That means you actually profit $850 per year from each client.

You also know that your clients stay with you for 8 years, on average. Over each customer lifespan, they then bring you $6,800 in profit.

Add in the initial $500 setup fee and subtract out the marketing and acquisition cost of $45, you get your final CLV of $7,255.

The Value of Knowing Your CLV

Once you know this type of data, you can start playing around with the variables to see how to maximize your profit. For example, you can see that by extending the life of a client by 2 years to 10 years total, you would increase their CLV to $8,955, or an $1,700 increase.

Increasing your fees to 1.5% and upping the value of your client’s portfolio could increase yearly customer revenue to $2,500 per year. That would dramatically increase your CLV to $23,955.

By knowing your Customer Lifetime Value, you’ll be able to better understand your revenue, costs, and how to increase your profits.

It also allows you to understand how much you can afford to pay to acquire a new customer. For some businesses, such as a restaurant, the initial purchase value of a new customer may only be $10 or $20. Looking at just that information, the restaurant owner would probably be very hesitant to pay $30 to acquire that new customer.

Now what if we told that restaurant owner that the true value of that customer is $3,400 over 5 years due to them coming back regularly? I’m sure they would be happy to trade $30 upfront for $3,400!

Track CLV Over Time

Once you have determined your current CLV, don’t forget to track it regularly over time. As the market changes and business costs fluctuate, your average CLV is likely to change, as well. Keep your data updated on a regular basis so that you can make appropriate strategic changes to maximize profit.

Now, ready to determine your own CLV? Use our calculator to get a rough estimate of the value of your customers.

Customer Lifetime Value (CLV) Calculator

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Although a good start, calculating and understanding your true CLV is generally much more detailed than using this simple calculator.

Let us help you you build, track, and understand your customer lifetime value specific to your business. Send us a message to get in touch!