WHAT IS CUSTOMER LTV (LIFETIME VALUE)?

The longer and more effectively a company works with each customer, the less it needs to spend on marketing to increase profit. This happens because of a key metric—LTV (Lifetime Value). By understanding how much money each customer brings over a certain period, a business owner or marketer can predict the net income from all future interactions with that customer.

Article outline

• What Is LTV and How to Calculate Lifetime Value?
• What Affects CLV?
• How to Increase Customer Lifetime Value?
• Why Is Customer Lifetime Value Important?
• Conclusion

What Is LTV and How to Calculate Lifetime Value?

Customer lifetime value is one of the most important metrics for any business—it shows the result gained from all combined marketing efforts.

Life-Time Value (LTV) and Customer Lifetime Value (CLV or CLTV) are synonyms used to describe the profit a company earns from a customer during their entire relationship with the brand. To calculate this metric, multiply the profit from a customer over a certain period by the duration of their interaction with the company—expressed in the same time frame.

This term was first mentioned in the 1988 book “Database Marketing”. There are several formulas to calculate LTV, but let’s start with the traditional, simplest one:

For example, if a customer has been ordering from an online store for 2 years, making 2 purchases per month, and each purchase is worth between $24 and $48, their lifetime value would be:

LTV = $36 (average spend per transaction) × 2 (purchases per month) × 24 months (duration of working with the company) = $1,728.

In this case, we calculated the customer value for 2 years. To get an accurate number, it’s important to consider whether that duration is typical. The metric can only be calculated correctly if the brand has been active for a long time and already has returning customers. After all, the customer we just mentioned may be at the very beginning of their journey with the store.

Let’s say they continue shopping for another 5 years, and then the products are no longer relevant to them—or a competitor convinces them to switch. In that case, the calculation would change:

LTV = $36 × 2 × 84 = $6,048.

So over 7 years (84 months), the customer would bring the company $6,048 in revenue. However, it’s important to understand this is not net income. During all this time, the store will continue encouraging purchases using different marketing platforms, tools, paid programs, call center support, and more.

There are two main strategies for calculating LTV.

#1 Historical Method of Calculating LTV

This method doesn’t help much with forecasting, but it can help you understand what happened and improve your marketing strategy. It’s based on your company’s past experience.

Lifetime Value = Total Revenue over a time period (TR) / Number of Customers during the same time (CQ).

This formula gives you the average profit from one customer. But it’s very general and doesn’t show differences between customer segments. The historical model uses past data to estimate customer value, but it doesn’t tell you if a customer will keep buying or not. It calculates value based on the average profit per sale. This model works well if most customers only buy during a specific time period.

However, in this model, only customers who are active at the time of the calculation are considered valuable. They might stop buying soon—which would make the result less accurate. On the other hand, customers who stopped buying earlier might come back later, but this model won’t count them as valuable anymore.

#2 Predictive Method (Forecasting Approach)

The predictive model tries to guess how current and future customers will behave using regression or machine learning. This helps you identify your most valuable customers and the most profitable products.

If your business has a lot of data and changes quickly, it’s hard to calculate LTV manually. For faster analysis, special tools are used—for example, features in Google Analytics or CRM systems. These tools collect data automatically and help you use not just current and past information, but also predict the future value of each customer.

Choosing between the two models depends on your company’s goals. If a marketer or business owner is focused on past data, the historical model is a good fit. If you want to understand future customer behavior, the predictive model is more useful—and you’ll need the right tools to use it.

Besides the standard way of calculating LTV—average profit per customer times how long they stay— there is a more advanced formula:

Lifetime Value = Average Order Value (AOV) × Purchase Frequency (F) × Gross Margin (GM) × (1 / Churn Rate (CR)).

This formula can be used not only for overall numbers, but also to analyze specific customer segments or target audiences.

“One of the main uses of CLV is customer segmentation, which starts with the understanding that not all customers are equally important. A CLV-based segmentation model helps a company predict the most profitable group of customers, understand what they have in common, and focus on them instead of less profitable customers”.—«Customer lifetime value», Wikipedia

Using this formula requires a good understanding of more business metrics.

• Average Order Value (AOV): AOV = Total Revenue ÷ Number of Orders.
• Purchase Frequency (F): F = Number of Orders ÷ Number of Unique Customers.
• Gross Margin (GM): GM = (Total Revenue − Cost of Goods Sold) ÷ Total Revenue × 100
• Churn Rate (CR): CR = (Number of Customers at the End of the Period − Number of Customers at the Start of the Period) ÷Number of Customers at the Start of the Period

This last number shows how many people stop being customers. After calculating it, you should find out at what stage in the funnel they dropped off and why.

A customer’s lifecycle starts when they first discover your brand and ends when they either join a loyalty program or stop interacting with your business. The outcome depends on how well your customer retention strategy works.The typical stages of a customer lifecycle (similar to a sales funnel):

• Reach
• Engagement
• First Conversion
• Retention
• Loyalty Growth

Understanding where and why customers leave helps you improve how you work with them.

What Affects CLV?

CLV (Customer Lifetime Value) is a dynamic number—it can change depending on whether your key business metrics improve or get worse.
If your goal is to understand the CLV of a specific target audience segment, or if you want to find weaknesses in your sales funnel, you should first calculate these key metrics and then work on improving them.

Average Purchase Value (AVP)

• Average Purchase Value (AVP) is calculated by dividing your Total Revenue by the Number of Purchases during a certain time period.
• Average Purchase Value= Total Revenue ÷ Number of Purchases

Analyzing this metric shows opportunities to increase the value of each transaction. It can give you new ideas for cross-selling and upselling. Based on this number, you might even adjust your pricing or change your packaging.

When calculating APV, it can be hard to get full and accurate data about each customer’s transactions. Customer behavior may also change by segment or season. Inconsistent data from different sales channels or platforms can also cause problems. That’s why it’s important to collect all analytics in one platform and regularly improve your setup.

Look at how customer behavior changes during certain times—for example, before holidays, on Black Friday, etc. During these seasons, customers may be more open to extra purchases. That gives you a great chance to increase average order value. Your business may have several similar periods every year—and if you plan ahead, you can create effective strategies to increase customer value.

Average Purchase Frequency Rate

• To calculate Average Purchase Frequency Rate (APFR), divide the number of purchases by the number of unique customers who made a purchase during that time.
• Average Purchase Frequency Rate= Number of Purchases ÷ Number of Unique Customers

It’s well known that increasing customer retention by just 5% can raise profits by 25% or more. The APFR (Average Purchase Frequency Rate) shows how engaged and loyal your customers are. But if you don’t have full data for all customer segments, the results might be misleading.

Purchase frequency can be affected by the season, the success of your advertising, the release of new products, or special offers. To calculate APFR correctly, make sure to regularly review and update your customer segments. Personalize your offers and run surveys to better understand your target audience.

To improve purchase frequency, your company should stay in touch with customers regularly. You can do this through content marketing, social media activity, push notifications, and messages sent by email or messengers.

But these reminders shouldn’t feel annoying—especially to customers who already buy from you. Segment your customers by activity level, and send reminders mainly to those who haven’t interacted in a while. Many tools can help you track customer activity, such as RFM segmentation or cohort analysis.

Customer Value

• To calculate Customer Value, multiply your Average Purchase Value by the Average Purchase Frequency Rate.
• Customer Value = Average Purchase Value × Purchase Frequency

Knowing your Customer Value (CV) makes it easier to find your most profitable customers and helps you segment them based on their buying habits. This leads to smarter ad campaigns, email marketing, and landing pages with higher conversion rates. To get accurate data, you should use a CRM system and set up a consistent process to assign value to each customer based on their personal transaction history.

Average Customer Lifespan (ACL)

• Average Customer Lifespan (ACL) is calculated by dividing the total number of years customers have been active by the total number of customers.
• Average Customer Lifespan= Total Customer Lifespan in Years ÷ Number of Customers

ACL helps you predict how long your customers will stay with your business. That means you can plan your budget better. Based on this number, you can build stronger relationships with your customers, lower churn, and use marketing channels that attract customers with high lifetime value.

Use reliable software to track the customer journey. You’ll only get the full picture if you combine data from different channels and follow the customer at every step of their journey.

Average Order Value (AOV)

To get customers to buy more or buy higher-priced products, use cross-sell and upsell strategies. Add personalized product suggestions to your website, emails, and social media messages. Set up retargeting ads and abandoned cart campaigns.

Gross Margin

• Gross Margin is the total revenue minus the cost of the products sold.

Formula: GM = (Total Revenue − Cost of Goods Sold) ÷ Total Revenue × 100

A low margin—even with good sales—may mean it’s time to reduce how much stock you buy. Maybe it’s a good time to run a sale. In some cases, cutting costs like shipping, sto

Churn Rate

If many customers stop buying after the first purchase—or soon after—it’s a sign that you need to improve your sales funnel or customer loyalty. Loyalty mostly depends on how good your service is.

CAC (Customer Acquisition Cost)

• Customer Acquisition Cost (CAC) is the average amount you spend to get one new customer.
• CAC = Total Costs for Ads, Marketing, Salaries, etc. ÷ Number of New Customers

To calculate CAC, divide your business expenses for a certain time period by the number of new customers you gained during that same time. Keep in mind that some tools—like SEO and content marketing—work best over the long term.

This is one of the most important metrics when working on LTV. By comparing CAC and LTV, you can see if your customers are actually profitable. The ideal CAC:LTV ratio is 3:1—meaning the value from a customer should be three times higher than what it cost to get them. If the ratio drops to 2:1 or lower, it’s time to review your spending.

Understanding all key metrics is important not just for improving LTV. Comparing your business KPIs to average numbers in your industry shows which areas need improvement. But if you don’t calculate LTV for different customer segments, you might misjudge how effective your marketing tools and channels really are.

How to Increase Customer Lifetime Value (LTV)?

How good your LTV number is depends on how much it costs to acquire a customer. For most businesses, profit from one customer should be at least three times higher than the CAC (Customer Acquisition Cost).
It’s also important to measure customer retention and churn, because both are closely linked to CLV.

There are several ways to increase LTV—and they work no matter what type or size of business you run.

Improve the Onboarding Process

This is about helping new customers connect with your brand. It usually happens in the first few days after their first purchase. You can improve the onboarding process with triggered emails, discount offers for the next order, and social media interaction—like sharing useful content.. 

All these efforts aim to bring new buyers back to your website and get them to place more orders or interact through other communication channels. You can start the conversation by inviting them to join a VIP Club or a Loyalty Program.

Kiko Milano, for example, invites customers to join their loyalty program. This helps encourage repeat purchases, bring people directly to their website, and avoid spending money on paid ads or other traffic sources.

Big retail brands create special programs to “catch” customers through email or SMS—and reduce ad spend. Ulta clearly lists all the benefits on a shopper’s first visit. They say, “Please register”—that message is carefully written by Ulta’s marketers, because they track every single purchase. A returning customer means almost no extra marketing cost.

Increasing Average Order Value

The best ways to increase Average Order Value (AOV) are upselling (offering more expensive versions of a product or service) and cross-selling (offering additional related products).
Great examples of brands using these methods are Amazon and Sephora, which show recommendations directly under the product description.

Tiered pricing and different package offers are popular in service-based industries, especially where customers pay by subscription. Special promotions can also help increase order value for certain customer groups.

Building Long-Term Relationships

To make customers feel like part of a community and trust your brand, it’s important to use social media and loyalty programs. Post real and helpful content on your blog that answers customer questions. Use storytelling to introduce your team, show case studies, and share customer reviews—especially user-generated content. 

On social media, customer engagement grows through giveaways, challenges, branded hashtags, and interactive posts. Ask for reviews and encourage people to post videos about your products. More product reviews build trust—just like on Amazon.

Offer Fast Support

To quickly help website visitors, use chatbots and callback widgets. If your product is complex or requires training, set up a helpful knowledge base.

“HubSpot data from 2023 shows that 66% of customers want a response to support emails in five minutes or less”. “How to Calculate Customer Lifetime Value (CLV) & Why It Matters”,—Clint Fontanella, HubSpot

Improve Customer Service

Make product returns easy and free. Clearly explain warranties. If your product is expensive or complex, back it up with proper documentation.

“A survey of 1,000 U.S. adults by Epsilon and GBH Insights showed that 80% expect personalization from retailers. Similarly, McKinsey predicts shopping will be deeply personalized by 2030”.—“What Is Customer Lifetime Value (CLV)”,—Monique Danao, Forbes Advisor

Make sure your customer support works across multiple channels. Companies with strong multichannel service retain 89% of their customers.

Simplify the Ordering Process

Make product returns easy and free. Clearly explain your warranty for products and services. If your product is expensive or complex, provide documents to support your claims.

If you use social media to promote products, make sure customers can place orders right there—just by messaging a manager directly. The more steps a customer has to take to make a purchase, the lower your conversion rate will be.

New technologies—like artificial intelligence (AI), 3D tours, and virtual try-on tools—can improve the customer experience, make online shopping easier, and make it more exciting.

Watching trends and using them in your business helps you keep your audience’s attention and keep them active. For example, IKEA’s mobile app not only shows products online—it also lets you use your smartphone camera to see how furniture and décor will look in your space.

Why Is Customer Lifetime Value Important?

Customer Lifetime Value (CLV) shows how valuable and profitable your existing customers really are. Analyzing this number helps improve your marketing strategy by focusing on buyers whose first purchase is just the beginning of their journey with your brand.

No matter your industry, it’s always easier to sell to an existing customer than to get a new one. According to marketing research, in the past 8 years, the cost of getting new customers has gone up by 222%. You don’t need a huge number of loyal buyers—even a small group of them can bring your company the most profit

Main Benefits of Knowing CLV

• Helps you set the right level of investment in marketing and sales—across specific channels and audience segments.
• Shifts your focus to long-term customer value, instead of just getting new customers all the time.
• Helps build better communication strategies and personalize how you talk to your target audience.
• Lets you measure customer loyalty—and improve service or product quality when needed.
• Helps increase loyalty and reduce customer churn—saving you money on attracting new buyers or subscribers.

Once you know who your ideal customer is, you’ll stop targeting unrealistic audiences. Your targeting will become more accurate—lowering cost-per-click (CPC) and increasing brand awareness through user-generated content.

“Some customers will leave no matter what. Only a few people will spend thousands of dollars to keep working with your business. And there’s no point in spending hundreds on low-value leads”.
—“What Is Customer Lifetime Value (CLV)”, Monique Danao, Forbes Advisor

The longer a customer stays, the more valuable they usually are. But in some industries, even one repeat purchase can make a customer highly valuable—like in real estate or luxury car sales. Still, understanding how LTV works can help improve business by offering add-ons, services, or extra features.

Frequently Asked Questions

Conclusion

There are two ways to calculate customer lifetime value: historical and predictive. The first one shows how much money the customer has already spent with your company. The second one estimates the future profit from that customer.

It’s recommended to calculate LTV for different segments of your customer base. This breakdown helps you better understand your costs and decide if it’s worth spending more to attract certain customers, or whether specific promotions and loyalty programs are profitable.

You can increase CLV through loyalty programs, better customer service, product improvements, community building, cross-selling, and up-selling. There are many other methods, and the order and relevance of using them depends on your business industry and goals. It’s important to track the customer lifecycle stages and test the effectiveness of different tools to retain customers at various levels of the sales funnel.

We recommend regularly identifying and analyzing your most loyal customer segment with high LTV. Information about these customers is useful when optimizing ad campaigns targeted at similar audiences. Also, keep an eye on market changes—a flexible business can quickly adapt to the needs of its target audience. LTV is not a fixed number—it’s a dynamic metric that should be checked and improved regularly, especially in relation to CAC (Customer Acquisition Cost).