Why (and How) Companies Should Calculate Customer Lifetime Value

But for companies looking to incorporate CLV, there’s often a challenge: the metric can be daunting to calculate. There are a variety of different formulas, some of which seem to emerge from an advanced calculus class, while others are simple but flawed. Even the more straightforward calculations can prove difficult if the data is hard to gather. At its most basic, the CLV calculation is the total revenue generated from an average customer minus the costs of acquiring and serving that customer.

On the revenue side, identify the average length of a customer relationship as well as the value they generate along the way—often this is simply an operational data revenue measurement andto experience data such as customer satisfaction or Net Promoter Score . The most successful formulas also incorporate a means of tracking fluctuations in customer spend over the years.

For expenses, include both your customer acquisition cost and also the amount you spend tending to your current customers—by continuing to market to them, engaging in customer service and support, and via operational expenses such as the cost of goods sold. Once you’ve gathered this data and settled on a CLV formula that makes sense for your business, you’re ready for the real fun: seeing how the number differs across products and segments, over time, and in response to changes such as a marketing campaign or the launch of a new product or feature. As you do so, you’ll likely see where you’re best at driving value, where your weak points lie, and where you might begin to make adjustments.

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