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What is customer lifetime value and why does it matter?

Creating loyal customers who purchase from you over and over again is every online business owner’s dream. And tracking customer lifetime value (CLV), how much each customer is worth to your company over time, gets you one step closer to that goal.

Last updated

26 Jan 2023

Reading time

7 min


With multiple formulas to choose from, calculating CLV can be challenging enough. But then you still face the seemingly monumental task of improving this metric. How can you get customers to block out all the companies offering similar products and keep returning to yours? 

In this guide, we look at what customer lifetime value is, how to calculate it, and why it’s so important for your business. We also provide you with four actionable tips on how to improve CLV and retain customers. 

Improve your customer lifetime value (CLV) with Hotjar

Use Hotjar’s tools to understand how users experience your site—and then offer personalized experiences and support. 

What is customer lifetime value?

Customer lifetime value is the revenue a company expects to earn from a single customer over the duration of their relationship. Knowing this figure helps you gauge customer loyalty and make decisions on spending, like how much to invest in retaining a current customer.

Let’s look at an example: 

If a pet owner spends $50 on a bag of dog food at your ecommerce store once a month, they’ll spend $600 over the course of the year, and $6000 if they continue shopping with you throughout the following ten years of the canine’s life. This is their CLV. 

If CLV rates increase, customers are spending more at your store—a sign that customer retention and loyalty are also on the rise.

Customer lifetime value vs lifetime value

While many businesses use customer lifetime value (CLV or CLTV) and lifetime value (LTV) interchangeably, others see a slight distinction between the two: 

CLV is the amount of revenue a single customer generates throughout their relationship with a company. LTV is the amount the average customer generates with a company. Technically speaking, CLV provides a granular insight, while LTV provides an aggregate one.

That said, most companies use the terms CLV, LTV, and CLTV interchangeably, regardless of whether they’re making calculations on a company-wide, group, or individual level.

How to calculate customer lifetime value

Many customer lifetime value formulas exist to account for nuances in data. These formulas fall into two categories: historical and predictive models. 

Historical customer lifetime value model

Historical customer lifetime value formulas are based on past data. These are typically more straightforward, so they’re good for businesses that see predictable customer behavior patterns—like purchases every other month—or for quick calculations by marketing teams to brainstorm ideas for targeted campaigns.

How to calculate historical CLV

To find the CLV for an individual customer, add up the total value of all purchases by a customer since they started shopping at your store. 

To calculate CLV for the average customer at your store, you’ll need four data points:

  • Average order value (AOV): the typical amount a customer spends in one visit to your ecommerce shop. Add up the amount customers spend over a set period (like a year) and then divide that by the number of checkouts in that period. 

  • Average purchase frequency (APF): the typical number of purchases customers make in a set timeframe. Add up the number of purchases at your store and divide by the number of shoppers who made them.

  • Customer value (CV): how much the average customer is worth to the company. Multiply the average order value by the average purchase frequency.

  • Average customer lifespan (ACL): the length of time a typical customer shops at the store. Calculate by measuring the amount of time between when a customer becomes active and when they drop off or churn.

With this data in hand, calculating CLV becomes simple:

CLV = Customer value x average customer lifespan

Let’s look at an example. 

Say an upscale online boutique specializes in high-quality children’s clothing, where the average customer spends $150 on each visit (the AOV) and makes three purchases per year (the APF). 

The customer value in that period is 3 x 150, or $450, and the average customer lifespan at the store is seven years. 

The store’s CLV is $450 x 7, or $3150. 

Predictive customer lifetime value model

Of course, customer lifetime value calculations aren’t always easy because consumer behavior often changes over time.

The predictive customer lifetime value model considers historical customer data and predicts future purchases based on customers’ current buying patterns. It’s perfect if you want a more precise prediction for your software-as-a-service (SaaS) company or ecommerce store, like when you need to create a detailed budget for a specific campaign.

How to calculate predictive customer lifetime value

You need some additional data here beyond what you need for the historical model, including 

  • Average gross margin (AGM), or the average amount of profit you earn per customer

  • Average number of transactions per month (T)

For ecommerce, try this predictive formula:

CLV = (T  x AOV) x AGM x ACL ÷ number of customers in that timeframe

For example, say your online record store has 100 transactions per month with an average order value of $50, and an AGM of 40%, or 0.40. Your ACL is 17 months. 

(100 x 50) x 0.40 x 17 = $34,000

Then, dividing that figure by the number of customers making purchases in that timeframe—let’s say 210 people—the CLV is $161.90. 

How to benchmark customer lifetime value: CLV to CAC ratio

Customer lifetime value doesn’t mean much in a vacuum—you need context to make sense of it. If your store’s CLV is $161.90, you won’t have any idea whether that’s ‘good’ or ‘bad,’ stable or changing. 

One of the best ways to gain an understanding of what your CLV means is to look at it as a ratio to your customer acquisition costs (CAC). To determine your CAC, divide all of your marketing and sales costs in a given period by the number of new customers you acquire.

If your CLV is $161.90 and your CAC is $52, your ratio is 3.1 to 1. Then, compare your ratio to industry benchmarks. Generally, a CLV to CAC ratio of 3:1 or higher is ideal.

3 benefits of customer lifetime value 

With so many key performance indicators (KPIs) to follow in the ecommerce space, why do experts consider CLV one of the most important ones to track?

Customer lifetime value is the magical intersection between creating a profitable business and customer satisfaction and loyalty. A high CLV indicates that an existing customer is happy with your product and customer experience (CX) to the point where they are willing to keep returning for more.

The importance of knowing your CLV could vary from brand to brand. For most brands, knowing your CLV helps determine the long-term viability of a product, forecast future ad spend, and tailor marketing towards a loyal customer base.

Kelly Singh
Vice President of Marketing, TrophySmack

Let’s take a closer look at three ways improving your customer lifetime value boosts profitability and CX:

1. Reduce customer acquisition costs (CAC) 

You’ve probably heard the saying, “It’s cheaper to retain a customer than acquire a new one.” While the statistics that go along with this expression vary, most experts agree that it’s true. Customer acquisition involves content and email marketing and advertising tactics like paid ads—and the costs add up fast. 

By improving your customer lifetime value, you boost your customer retention, reducing your CAC over time.

2. Inform strategy and spending

Determining customer lifetime value helps you strategize for future marketing investments. If you know that a customer’s CLV is $300, it doesn’t make sense to invest $300 in retaining that client through email campaigns, discount offers, and targeted ads. Instead, you need to create a plan to spend just enough to keep the customer engaged and satisfied while maintaining solid profit margins.

You can also use CLV when planning inventory and developing new product lines. Segment your customers by the highest CLV to see which products they prefer. Then, introduce related products they’ll also enjoy.

3. Improve customer loyalty 

Customer lifetime value goes hand in hand with loyalty. When one improves, so does the other. 

Specifically, tracking CLV helps you see how customer churn affects your bottom line. Then, you know exactly when to introduce churn management and customer retention strategies, improving your CX. Satisfied customers become more loyal to your brand and increase their spending over time.

4 tips to improve your ecommerce CLV

Increased customer lifetime value means more revenue for your business over time. But you can’t just hope to see that metric rise when you check your analytics. Here are four tips to actively improve CLV for your ecommerce shop:

1. Personalize the customer experience

Personalization helps customers feel valued and seen, increasing the odds that they’ll make additional purchases from you.

To personalize the overall customer experience, start by gathering data to get to know your customers—who they are, what they want, and why.

We’re looking at our returning customers‘ shopping habits, site search queries, and more, to not only reach them but to continue to retain them.

Kelly Singh
VP of Marketing, TrophySmack

💡Pro tip: use Hotjar Recordings to get to know your customers’ shopping habits. Watch playbacks of them interacting with your store’s user interface (UI) design elements like buttons, sliders, search boxes, and checkout form fields. Then, create hypotheses on how to use this data to enhance the user experience (UX)—and improve customer retention, customer relationships, and CLV.

Hotjar Recordings lets you see customers’ mouse movements and clicks as they shop on your site.

2. Add value with targeted emails and content

Once you gather data, use it to segment customers into groups. Create customer segments based on similarities like satisfaction levels from surveys, demographics, or interests. 

You can also create segments based on customer lifetime value itself. For example, if you find that your loyalty club members have twice the CLV of non-members, you may invest more into this segment by providing them with discount codes and special offers. To boost the CLV of one-time purchasers, send out informational emails, video tutorials, and content guides to help them better understand product features and introduce them to new offerings.

#Doe Beauty, a direct-to-consumer seller of silk eyelashes, sends this email to customers after their second purchase. The fun copy fosters a sense of reciprocal loyalty and drives the customer to take the next step in the relationship by downloading the Doe app. (Source: doebeauty.com)
Doe Beauty, a direct-to-consumer seller of silk eyelashes, sends this email to customers after their second purchase. The fun copy fosters a sense of reciprocal loyalty and drives the customer to take the next step in the relationship by downloading the Doe app. (Source: doebeauty.com)

3. Provide omnichannel customer support

When you support shoppers on their favorite platforms throughout the customer journey, you create a sense of satisfaction and build trust.

For example, one customer might prefer one-to-one attention via direct messaging on Twitter, while another with a do-it-yourself mentality might want on-page frequently asked questions (FAQs) or a collection of videos to learn how to use the product.

By providing support and helpful content, shoppers will see your brand and product as having unique value, creating a sense of brand loyalty that improves their CLV.

4. Collect feedback (and make it count)

The key to creating happy customers—and boosting their lifetime value—is to get feedback on their experience and then make tweaks and adjustments to your website, product, service, or shipping. Responding to feedback shows you’re responsive and builds trust. 

Install a Hotjar Feedback widget on a product page to ask customers if they found the information they need, or launch a simple survey to ask them how they prefer to get support.

#Hotjar Surveys lets you customize questions to find out what customers need.
Hotjar Surveys lets you customize questions to find out what customers need.

Take a customer-centric approach to CLV

While it’s tempting to zero in on the value the customer provides to your business, it’s just as important to consider how you can add value to their experience.

Use product experience (PX) insights to get to know your customers, so you can develop personalized marketing approaches to keep customers returning for more—and increased CLV and lower costs will follow.

Ultimately, the loyal, repeat customer doesn’t need to be sold to, just continue to engage with them and show them that you value them at just the right time.

Kelly Singh
VP of Marketing, TrophySmack

Improve your customer lifetime value (CLV) with Hotjar

Use Hotjar’s tools to understand how users experience your site—and then offer personalized experiences and support. 

FAQs about customer lifetime value