What Customer LTV Is & How to Calculate It

Everyone strives for long-term relationships. The start of a valuable relationship with a new customer is why most businesses focus on retaining them. However, what if the actual problem isn't the duration of their stay, but the worth and monetary advantages they provide over time? For tech and product teams, this means understanding the bigger picture through customer lifetime value (LTV) and looking beyond short-term wins.

What is customer lifetime value (CLV / LTV)?

Customer lifetime value (also known as LTV, CLV, or CLTV) is a metric representing the total revenue a business can expect from a customer throughout their entire relationship. It helps companies to understand how much to invest in acquiring and retaining customers, as well as in other areas of the business.

Why should you know CLV (LTV)?

Firstly, it's helpful to understand how much a business can invest in winning over one typical client.

Secondly, it enables you to calculate the potential gross profit that a single customer will generate for the business over time.

Thirdly, knowing the CLV, you can also calculate the critical CLV/CAC ratio, which helps you understand how effectively investments in customer acquisition are working. Generally speaking, this is true for a specific channel, segment, or cohort.

Customer lifetime value formula

Here’s the simplest customer lifetime value (CLV) calculation:

Customer LTV = Average Purchase Value (APV) × Purchase Frequency (APF)  × Average Customer Lifespan (ACL)

The APV, APF, and ACL also have their own determination formulas, where:

• APV = Total Revenue / Total Number of Purchases

• APF = Number of Purchases / Number of Unique Customers.

• ACL = 1 / Churn Rate, where Churn Rate = (Customers at the beginning of the period – Customers at the end of the period) / Customers at the beginning of the period.

Example of CLV calculation

Let's imagine that in February, your business started with 600 customers, and by the end of the month, there were 350 active ones left. During this time, the company received $75,000 in revenue from 300 purchases.

Let's calculate the key indicators:

1. APV (Average Purchase Value) = $75,000 ÷ 300 = $250

2. APF (Average Purchase Frequency) = 300 ÷ 600 = 0.5 (on average, half a purchase per customer per month)

3. ACL (Average Customer Lifespan) = 1 ÷ {(600 – 350) ÷ 600} = 1 ÷ (250 ÷ 600) = 1 ÷ 0.416 ≈ 2.4 months

Now let's calculate CLV:

CLV = APV × APF × ACL

CLV = 250 × 0.5 × 2.4 = $300

This means that each customer will bring the business an average of approximately $300 over 2.4 months of cooperation.

LTV vs. ROI vs. CAC

Although there are many indicators, LTV, ROI, and CAC are most often used as the basis for strategic decisions. They help you to understand the profitability of your company's customer relationships, the effectiveness of your advertising investments, and the actual cost to your business of generating new sales. However, these terms are often confused, so let's define them one by one:

LTV (Customer lifetime value)

LTV, or Lifetime Value, shows, on average, how much money one customer brings in over the entire period of their relationship with the company. It is a long-term indicator that takes into account average spend, purchase frequency, and the length of the relationship. It answers the question: 'What value does the customer have for the business in the long term?'

ROI (Return on investment)

ROI reflects the profitability of an investment. Unlike LTV, it can be used to calculate the profitability of a single marketing campaign, investment in a product, or even the business as a whole. The formula is based on the ratio of profit to resources spent. It is an indicator of investment effectiveness, not customer value.

CAC (Customer acquisition cost)

CAC shows how much money a company spends to attract one new customer. It is calculated by dividing the cost of advertising, marketing, and sales by the number of customers attracted. It answers the question: 'How much does it really cost a business to acquire a new customer?'

It is common practice for businesses to compare their LTV (Life Time Value) and CAC (Customer Acquisition Cost). If LTV significantly exceeds CAC (by a factor of at least 3), this is a sign that the customer acquisition strategy is effective. ROI indicates the overall profitability of the investment.

What is the average customer lifetime value?

The average customer lifetime value (CLV) represents the total amount of money a business anticipates earning from each customer throughout their relationship. It takes into account the average customer purchase value, the frequency of customer purchases, and the average duration of customer loyalty. Understanding your CLV allows you to make informed marketing and financial decisions, such as adjusting your advertising budget or creating loyalty programmes.

How does customer segmentation affect average CLV?

Not all customers are equal. Segmenting customers by behaviour, purchase frequency, spending amount, or acquisition channel enables you to divide them into groups with high, medium, or low CLV. This allows you to:

• Invest more in segments with high potential.

• Develop special retention strategies for less active customers.

• Predict total revenue more accurately.

Which CLV (LTV) is good and which isn't?

The higher it is, the better. Ideally, it should be several times higher than CAC. Unfortunately, there is no single measure — it depends on several factors:

1. The business area (CLV will be higher in a car dealership than in a coffee shop, for example).

2. The perceived value of goods and services (in an elite establishment, CLV will be higher than average).

3. Business model (CLV will be greater for a Netflix subscription than for a shawarma seller at a train station who relies on one-time orders).

LTV (CLV) marketing strategy

Customer lifetime value (CLV) is a powerful tool for building an effective marketing strategy, not just a financial metric. CLV enables you to focus resources on the segments that generate the most long-term value.

Optimising customer acquisition costs 

A key element of the strategy is the LTV-to-CAC ratio (where LTV is lifetime value and CAC is customer acquisition cost). If CLV significantly exceeds CAC (by 3–5 times, for example), customer acquisition is considered adequate and financially justified. 

Examples of LTV (CLV) to use in marketing

1. Targeting involves focusing advertising on customer segments with high CLV, which are more likely to generate higher revenue.

2. Personalisation involves offering individualised recommendations and promotions based on purchase history and behaviour, thereby increasing the frequency of repeat sales.

3. Customer retention involves implementing loyalty programs, promotions, and email marketing to reduce churn and increase the average customer lifetime value.

Tools for optimising marketing costs

Optimising marketing expenditure has a direct impact on the LTV to CAC ratio and enables more efficient budget management. To achieve this, companies use various tools:

• CRM systems (e.g., HubSpot and Salesforce) help to track the customer lifecycle and assess customer value.

• Analytics platforms (e.g., Google Analytics, Power BI, and Tableau) allow you to analyse user behaviour and predict CLV.

• Advertising management platforms automate the process of campaign planning and media buying. Medialister, for example, combines media orders and advertising campaign planning in a single system, making costs more transparent and controllable. This enables companies to focus their budgets on segments with the highest CLV and reduce customer acquisition costs (CAC).

How to increase customer lifetime value?

To improve CLV, all of its components need to be improved:

Step 1: Increase the average order value (AOV)

Increasing the average check directly affects CLV. This can be done in several ways:

• Raise prices or offer premium plans for high-value customers;

• Encourage upsells (switching to more expensive plans) and cross-sales (related products or services);

• Offer free shipping or bonuses for orders exceeding a certain amount to encourage customers to make larger purchases.

Step 2: Increase purchase frequency (APC/ACL)

The more often a customer returns, the higher the CLV becomes. To achieve this, a business can:

• Create additional product value (updates, new features, exclusive content).

• Launch loyalty programs and bonus systems that encourage customers to make more frequent purchases.

• Use personalized email and SMS marketing to remind customers about repeat purchases.

• Enhance the quality of service and support to ensure customers remain satisfied and do not switch to competitors.

Step 3: Reduce the cost of goods sold (COGS)

Although COGS does not directly influence customer behavior, reducing costs increases marginal CLV. This can be achieved by:

• Optimizing procurement and finding more profitable suppliers;

• Automating production processes;

• Reducing indirect costs (logistics, warehousing costs, and loan servicing).

Step 4: Extend customer lifespan (retention & churn)

Another important factor is increasing the duration of customer relationships. Retention Rate and Churn Rate play a key role here:

• Increasing retention through quality service, personalization, and regular communication.

• Reducing customer churn through quick problem solving, special offers for “risk” users, and a win-back program.

Step 5: Using subscription models

The subscription model is one of the most effective ways to increase CLV, as it ensures stable recurring payments and long-term customer relationships. To increase CLV in subscription businesses, companies can:

• Offer flexible rates and upgrades to more expensive packages.

• Reduce churn through a convenient user experience and regular updates.

• Use retention marketing (reminders, bonuses for continuing the subscription).

FAQ

What is customer lifetime value (CLV)?

Customer Lifetime Value (CLV) shows the total revenue expected from a customer over their relationship. It takes into account purchase value, frequency, and lifespan, enabling businesses to measure customer value and optimize their marketing efforts.

How to calculate LTV?

You can calculate LTV (Customer Lifetime Value) with a simple formula:

Customer LTV = Average Purchase Value (APV) × Purchase Frequency (APF)  × Average Customer Lifespan (ACL)

What is a good LTV?

What constitutes a 'good' LTV depends on your industry and business model, but a standard benchmark is for LTV to be at least three times higher than CAC (customer acquisition cost).

• If LTV is less than CAC, acquiring customers becomes too expensive and unsustainable.

• If LTV is approximately three times higher than CAC, your marketing and sales efforts are considered healthy.

• Subscription and SaaS businesses often aim for an even higher ratio (4–5x CAC) to ensure profitability and growth.

How to increase customer lifetime value?

To increase customer lifetime value (CLV):

• Increase the average order value by offering upsells or bundles.

• Encourage repeat purchases through loyalty programmes or personalised marketing.

• Extend the customer lifespan by improving service and reducing churn.

• Use subscription models to generate predictable, recurring revenue.

What is the difference between LTV and ROI?

LTV measures the total revenue a customer brings over their lifetime, while ROI measures the profitability of any investment.