What Is Customer Lifetime Value?
Posted: Mon Feb 17, 2025 10:19 am
Customer lifetime value describes the total amount of revenue your average customer will deliver over their typical lifespan.
For instance, imagine that the average customer stays with your company for about 2 years and makes five purchases from your website each worth an average of $50. Your CLV in this case would be $250.
Why Knowing Your CLV Matters
CLV matters when selling goods online because it presents a holistic view of your customers’ revenue potential. Rather than focusing on first-buy metrics like AOV, you get a true idea of just how much each customer you acquire will be worth over their lifespan.
As a result, you can use this metric not just to determine the success and efficiency of your marketing spend, but also to shift your emphasis from customer acquisition to customer loyalty. The AOV for the first conversion matters little if the major purchase comes once a customer has already tried out your products.
We know, for instance, that it’s five to 25 times more expensive to acquire a new customer than it is to retain an existing one. We also know that existing customers are 50% more likely to try a new product and spend on average 31% more than new customers. A focus on CLV allows you to shift your marketing efforts to build a more loyal, profitable customer base.
How to Calculate CLV
There are many ways to calculate CLV, ranging from the simple to the complex. Here is a common formula:
Customer lifetime value formula
To calculate your AOV, divide revenue by the total number of orders in a given timeframe. Finally, your repeat purchase rate is the percentage of customers who purchase more than once from you in the same timeframe.
How CAC and CLV Work Together
One focuses on cost, while the other hits on the value side of the equation. That might give it away: CAC and CLV are at their best when closely intertwined to provide an overview of business success.
To accomplish that feat, eCommerce experts recommend gcash databasefocusing on a metric called CLV to CAC ratio. As the name suggests, this metric compares the full value of a customer to the cost of acquiring that customer.
If the ratio is less than 1, the company is losing revenue each time it acquires a new customer. A ratio above 1 suggests revenue gained, but not necessarily profitability; after all, other costs of running the business unrelated to acquiring a customer also need to be considered.
Generally speaking, most merchants focus on a ratio greater than 3, although that can change based on whether the merchant is in high-growth mode or maturing, the competitive environment, and other factors.
A ratio above 5 can suggest improvements, as well. It’s an important indicator that investing more in marketing would improve acquisition efforts and yield more online sales.
For instance, imagine that the average customer stays with your company for about 2 years and makes five purchases from your website each worth an average of $50. Your CLV in this case would be $250.
Why Knowing Your CLV Matters
CLV matters when selling goods online because it presents a holistic view of your customers’ revenue potential. Rather than focusing on first-buy metrics like AOV, you get a true idea of just how much each customer you acquire will be worth over their lifespan.
As a result, you can use this metric not just to determine the success and efficiency of your marketing spend, but also to shift your emphasis from customer acquisition to customer loyalty. The AOV for the first conversion matters little if the major purchase comes once a customer has already tried out your products.
We know, for instance, that it’s five to 25 times more expensive to acquire a new customer than it is to retain an existing one. We also know that existing customers are 50% more likely to try a new product and spend on average 31% more than new customers. A focus on CLV allows you to shift your marketing efforts to build a more loyal, profitable customer base.
How to Calculate CLV
There are many ways to calculate CLV, ranging from the simple to the complex. Here is a common formula:
Customer lifetime value formula
To calculate your AOV, divide revenue by the total number of orders in a given timeframe. Finally, your repeat purchase rate is the percentage of customers who purchase more than once from you in the same timeframe.
How CAC and CLV Work Together
One focuses on cost, while the other hits on the value side of the equation. That might give it away: CAC and CLV are at their best when closely intertwined to provide an overview of business success.
To accomplish that feat, eCommerce experts recommend gcash databasefocusing on a metric called CLV to CAC ratio. As the name suggests, this metric compares the full value of a customer to the cost of acquiring that customer.
If the ratio is less than 1, the company is losing revenue each time it acquires a new customer. A ratio above 1 suggests revenue gained, but not necessarily profitability; after all, other costs of running the business unrelated to acquiring a customer also need to be considered.
Generally speaking, most merchants focus on a ratio greater than 3, although that can change based on whether the merchant is in high-growth mode or maturing, the competitive environment, and other factors.
A ratio above 5 can suggest improvements, as well. It’s an important indicator that investing more in marketing would improve acquisition efforts and yield more online sales.