Article | 5 min read

How to Calculate Customer Lifetime Value (CLV)

Find out how to calculate customer lifetime value to help you predict future revenues and guarantee business success. Take the stress out of CLV with Zendesk.

By Leighton Jacobs

Last updated May 15, 2023

Calculating your customer lifetime value (CLV) can seem daunting. With so many different formulas and conflicting explanations, you might be unsure where to start or even confused about what exactly it measures.

But don’t worry because we’re here to explain the ins and outs of this important metric. After all, measuring your CLV can help guide marketing spend, uncover marketing impact, and identify your most valuable customers.

In short, CLV provides insight into customer loyalty and satisfaction. But unlike Net Promoter Score (NPS) and customer satisfaction (CSAT), CLV is all about cold, hard cash. It’s the perfect metric to help you work out how to encourage customers to spend more money with you over time. Let’s dive right in.

The CLV formula

Customer lifetime value (CLV) is the total revenue a customer will generate for a company over the course of their relationship.

But that’s a little too dictionary for us, so let’s look at an example. Imagine you buy the same loaf of bread from your local convenience store once a week. If this loaf costs £2 and you shop there for seven years, your CLV would be:

£2 (price) x 52 (weeks) x 7 (years) = £728

This quick example gives us the basic formula for CLV. Remember, CLV is all about the sales revenue a customer provides over time. It’s that simple:

Price x Number (or rate) of purchases x Period of purchases

Although this is the basic formula for CLV, it’s important to remember that there are different definitions of CLV. Basic calculations—like the one above—look at revenue but you can also include many other factors like gross margin, operating expenses, shipping costs, marketing expenses, etc.

How to calculate CLV

We’ve already got the basic formula, which includes the price of the product or service, how many times the customer bought it, and over what period they bought it. But there’s a problem: this only considers one customer and one product.

Of course though, in the real world, businesses have multiple products or services and multiple customers. This means that we need to modify the formula a little. But don’t worry, it’s easier than you think. All we need to do is switch to averages.

So, instead of the price, we need to know the average transaction value; instead of the number of purchases, we need the average number of transactions; and instead of the period of purchases, we need to find out the average customer lifespan. And while that might sound complicated, it’s a piece of cake:

Average transaction value = Total revenue ÷ Number of orders

Average number of transactions = Number of transactions ÷ Number of customers

Average customer lifespan = Total of customer lifespans ÷ Number of customers

So, for example, if I buy one loaf of bread for £1 and you buy another for £2, our average transaction value would be:

£3 (total revenue) ÷ 2 (number of orders) = £1.50

The same applies to the number of transactions: if I buy the loaf twice a week and you only buy it once, our average number of transactions would be:

3 (number of transactions) ÷ 2 (number of customers) = 1.5

So, adjusting the equation for averages gives us a more complete formula, and one that you can start using in your business right now:

CLV = Average transaction value x Average number of transactions x Average customer lifespan

Quick side note: sometimes people give different parts of the formula different names. For example, average transaction value might be called average purchase value. Or average customer lifespan might be referred to as average retention period. What’s more, average transaction value multiplied by average number of transactions is sometimes combined as customer value. But fear not, it still means the same thing.

CLV, CAC, and Cost to Serve

Finding out how much each customer is worth to your business is great. But it only really makes sense if you look at the profit they provide. And this means adding expenses to the formula.

Whilst CLV can be viewed as the income side of the equation, customer acquisition cost (CAC) is the expense side. In simple terms, CAC is the amount of money a business spends on marketing to attract new customers. For example, if your CLV for the local store is £500 but they spent more than £500 acquiring you as a customer, they’re ultimately out of pocket.

Acquisition costs are one thing, but you also can’t forget about all the money you spend to serve your customers. This can include things like shipping fees, rent expenses, and staff costs—essentially anything that can be considered a cost of doing business.

If we want to see how much of that CLV is left when you take into account all your relevant expenses, we can add the average cost of acquiring and serving customers to our formula. And don’t worry, this extra part is easy to work out too:

Average cost of acquiring and serving customers (each customer) = Total expenses to acquire and serve customers ÷ Number of customers

So, here’s the new formula:

Average transaction value x Average number of transactions x Average customer lifespan – Average cost of acquiring and serving each customer

Now, let’s bring this all together with an example. Imagine that your local store has 20 customers who spend an average of £12 every time they shop. On average, they visit 1.9 times a week for 5 years. If the store spends £450 a year on rent, staff, and marketing, its CLV would be:

£12 x 1.9 x 5 – 112.5 = £1.50

£1.50 in profits per customer might be a sign that the store needs to make changes. But it’s important to note that this would be a historical CLV because it’s based on past figures. However, you can also calculate predictive CLV, which uses existing data to make forecasts about how long a customer will remain loyal and how much they’re likely to spend over that time.

Zendesk does the maths, so you don’t have to

Customer lifetime value (CLV) is an important metric for any business. Zendesk captures all your customer and sales data, making it easy to automatically calculate CLV for your company, individual business units, specific customer segments, and more.

Zendesk is also the perfect tool to improve your CLV by optimising your customer experience. Provide omnichannel customer service, boost customer engagement, and better understand your relationships—all from a single, easy-to-use platform.

We’ve got the metrics and insights to help unlock your success. Track, measure, and improve your CLV with Zendesk to keep customers coming back for more, for longer.