What Is Customer Lifetime Value? How to Calculate CLV

Calculating customer lifetime value (CLV) helps businesses identify their most important customers and set priorities. Measuring the revenue you’ll earn over the course of your entire relationship with an average customer helps shape your marketing and customer retention strategies. 

By determining how valuable they are to your business, it’s easier to estimate your budget to acquire similar customers.

Neil Hoyne, chief strategist at Google, recommends businesses focus on CLV over other popular business metrics like conversion rate.

“Clicks and conversions may be a little bit shortsighted,” Neil says on an episode of Shopify Masters. “You lose touch with those customers who may come back multiple times, contribute a lot of value, but are lost in the noise of people who are simply transactional.”

In this guide, you’ll learn why CLV is important, how to calculate it, and how to increase your CLV with advice from popular brands. 

What is customer lifetime value (CLV)?

Customer lifetime value (CLV) measures how much a customer will spend over the course of their relationship with a business. Find it by taking your average purchase value, sometimes called the average order value. Multiply it by average purchase frequency, then multiply that by the average customer lifespan.

For example, if your average customer makes a $50 purchase every six months for four years, your CLV is $400.

Brands calculate CLV, also known as lifetime value (LTV), for the average customer, then use those numbers to make predictions about individual customers and customer segments. 

“When you start grouping customers together, [you’ll see] some customers are incredibly valuable,” Neil says. “The question that businesses have to ask themselves is, ‘What makes these great customers so special?’”

Why is customer lifetime value important?

Customer lifetime value estimates the benefits of acquiring and retaining any given customer. Here’s why CLV is important:

Boost loyalty and drive repeat sales

Segmenting customers based on CLV allows you to identify your biggest spenders. By studying this segment, you’ll identify which products they enjoy and which marketing channels and materials attract them. From there, tailor the customer experience to their preferences with the goal of increasing customer loyalty, as Neil explains. 

“You just get this understanding [that] these are the people your business gets along with,” he says. “You [can be] more focused as to who you pay attention to, what you do in your business, the products you build, the marketing campaigns you have, and the people you service first.” 

Increase your LTV to CAC ratio

According to Shopify research, customer acquisition costs (CAC) typically range from $127 to $462, depending on your industry. A good LTV to CAC ratio is 3:1. Improving your customer lifetime value with minimal additional ad spend increases your LTV/CAC ratio, indicating better marketing efficiency. 

How to calculate CLV

Before you can use this CLV formula, you need to calculate: 

Average order value (AOV). AOV measures the average amount customers spend per transaction. The formula is: 

AOV = Total Revenue / Total Number of Orders

Purchase frequency. Purchase frequency is the average number of orders a customer places within a certain timeframe. The formula is:

Purchase Frequency = Total Number of Orders / Total Number of Unique Customers 

Average customer lifespan. This number measures the length of time customers remain active before they stop making purchases. The formula is:

Average Customer Lifespan = Total Number of Years All Customers Are Active / Total Number of Customers 

Businesses can use analytics tools like Shopify Analytics or a customer relationship management (CRM) system to calculate these numbers. 

The basic CLV formula is:

CLV = (Average Order Value × Purchase Frequency) × Average Customer Lifespan

If a clothing store has an average purchase value of $50, the typical customer buys from them three times a year, and stays with them for two years, the formula would be:

CLV = ($50) x (3 purchases) x (2 years) = $300

In this case, the average customer would be worth $300 to the company.

How to improve customer lifetime value

• Diversify product catalog
• Reward commitment
• Identify upselling opportunities
• Offer a frictionless checkout experience 

CLV is not a fixed number. Here are a few suggestions from brands on how to increase customer lifetime value: 

Diversify product catalog

Some brands’ products do not lend themselves to repeat purchases, which can limit CLV. For example, Ridge started with a single product offering of a scratch-resistant wallet made of premium materials. 

“There was no LTV in the business,” CEO Sean Frank says on Shopify Masters. “We have a small group of superfans who might buy two to four to 10, but 99% of people are never buying another wallet. So we [had] this problem where we [had] … millions of customers all incredibly happy, all love the brand, never coming back to buy another thing.”

To solve this, Ridge expanded their product range by selling luggage, rings, and accessories for tech products (like phone cases). Ridge created dummy product listings then observed which ones customers purchased to validate product ideas. 

“We ended up committing to a lot of these product launches,” Sean says. “We tried t-shirts. We tried socks. Those did not go well. We tried water bottles. Those went OK. It’s always swapping these products out and seeing how far you can expand the brand.” 

If the product testing didn’t work out, Ridge would refund and apologize to customers. Sean suggests gifting disappointed customers a free item for their trouble. 

This product market fit guide shows how to test product ideas and how to use customer feedback and marketing strategies.

Reward commitment

Incentivizing customers who keep coming back can help your CLV. 123 Baby Box, a subscription box service offering developmentally appropriate toys for children, put this into practice. They raised their CLV by 40% by changing their subscription tiers to reward customers who signed on for longer periods. 

"We analyzed our CLV and saw a major drop-off after three months,” says Zarina Bahadur, CEO and founder of 123 Baby Box. “So we reworked our pricing to reward commitment.” 

If customers switched from a subscription that renewed monthly to one that renewed every six months, they’d save $10 per box. “This simple shift boosted our average subscription length from five months to eight, adding nearly $150 in CLV per customer. Churn dropped by 18%, and referrals increased because customers felt like they were part of something special.”

Identify upselling opportunities

Upselling, or encouraging customers to buy more expensive products, is a way to increase average order value (and therefore improve CLV). And it’s not limited to physical products.

For example, FactoryPure, which sells household machinery like air purifiers, heaters, and generators, upsells its extended warranty with a pop-up that appears after a customer adds a product to their cart. 

“When we initially offered the warranties, it was more so to sell more refurbished product, and now they’ve matriculated into the new products. It’s a very high success rate with people that end up purchasing a warranty,” FactoryPure cofounder Eugene Ravitsky says on an episode of Shopify Masters. 

“When we were very heavy on refurbished items, that was our biggest complaint, because a lot of refurbished items don’t come with a full warranty,” Eugene says. “[Now] a customer can get an extended warranty for up to five years, which also is very helpful too to ease their mind.”

It’s also an easy way for FactoryPure to increase AOV, because a third party handles the warranty process.

Offer a frictionless checkout experience

Accelerated checkout can encourage existing customers to keep coming back. When shirt brand Untuckit started using Shopify’s accelerated checkout, Shop Pay, they saw a 33% increase in customer repurchase rate.

“One-tap checkout provides an optimal experience, especially for our returning customers on the go shopping via mobile,” says Napon Pintong, senior manager of ecommerce at the brand.