Do you want to know what customer lifetime value is and how it works? Maybe you’re trying to reduce your ad spend. Or you feel like you aren’t getting enough repeat buyers with ALL those efforts.
Whatever your goal is, CLV helps you see the real (and potential) value of each customer.
In this guide, we’ll walk you through how to calculate it, improve your customer lifetime value, and make better calls for your business.
What is Customer Lifetime Value (CLV)?
Customer lifetime value (CLV) tells you how much money a single customer is likely to spend with your brand, from their first order to their last.
Imagine you owned a supplement store. One of your regulars, Bob, bought a $30 bottle of probiotics every month. She stayed with your brand for two years, which meant she had already spent $720 with you. That’s her customer lifetime value so far.
Knowing your CLV will help you see your customer’s real value (in monetary terms). Plus, it shows you how much you can spend to keep them.
Sometimes, CLV gets mixed up with LTV (lifetime value). And that’s okay because they really are a bit similar. But LTV is usually the average of all your customers combined, while CLV lets you focus on one person or group at a time.
You can have an average lifetime value of $400. And also a $750 CLV on one customer in our VIP tier.
Why is Customer Lifetime Value Important for Businesses?
Customer lifetime value is your revenue radar. If you’re not tracking it, you’ll waste money on the wrong strategies… and people. We don’t want that to happen.
It changes how you view every customer interaction. So, from “what can I do to make more sales this month?” you start asking “how do I keep this person buying?”
Experts agree that a 3:1 CLV to CAC (customer acquisition costs) ratio is a strong sign that your business is doing well. In layman’s terms, you must earn $3 for every $1 spent to bring a customer in.
If you know your current CLV and CAC, you can adjust your strategy for better customer retention. And focus more on getting loyal customers.
One of our clients, a DTC coffee brand, noticed that their gift box buyers had a high average order value but poor repeat purchase rates. What they did was segment those one-time shoppers and built a follow-up strategy (they offered a discount on their customers’ next two purchases).
It worked! And they saw a 19% lift in second purchases within just three months.
That simple effort earned them more repeat buyers. And the best part? They didn’t have to spend more on marketing because they locked in on their high-value customers.
Key Customer Metrics Related to CLV
Now that you know the importance of your CLV, it’s time to learn the relevant metrics like average purchase value (APV), retention rate, and churn rate.
Here’s their formula:
| Metric | Formula |
| Average Purchase Value (APV) | Total Revenue ÷ Total Number of Orders |
| Average Purchase Frequency Rate | Total Orders ÷ Total Number of Customers |
| Customer Retention Rate | (Customers End of Period – New Customers) ÷ Customers Start of Period) × 100 |
| Churn Rate | (Customers Lost During Period ÷ Customers at Start of Period) × 100 |
| Customer Acquisition Cost (CAC) | Total Marketing and Sales Spend ÷ Number of New Customers |
Average Purchase Value (APV)
APV shows how much a customer typically spends each time they order. It’s one of the easiest ways to measure how much value you’re getting per transaction.
The higher your APV is, the more revenue you’re earning per order. For example, if most customers spend $45 per checkout, that’s your APV. And you can increase this by upselling, creating bundles, or offering add-ons.
Purchase Frequency Rate
Next is the purchase frequency rate (PFR). It’s the percentage of how often a typical customer buys from you (in a certain time frame).
PFR is besties with customer retention because the more often your buyers shop, the higher the chance they’ll stay longer.
One of our clients, a niche perfume brand, noticed that shoppers who returned every two to three months were also the ones who bravely bought their newly released scents. This shows the value of staying close to your repeat buyers.
Customer Retention Rate
Customer retention rate shows how well you’re keeping customer relationships over time.
The average retention rate in e-commerce is 30% (wayyy lower than other industries). That’s because online shoppers have endless options, and customer loyalty can be hard to win.
And if you don’t improve your retention rate, you might keep paying more to replace your existing customers. That means lower profits… and weaker CLV.
If you’d like to learn more, we wrote a full guide on managing your customer retention rate.
Churn Rate
Churn rate is the opposite of customer retention. It tells you how many people stopped buying from you over a certain period.
We like to call it the “villain of customer satisfaction.” Because a high churn rate means your customer experience needs a makeover.
For example, if you started the month with 500 customers and lost 50, your churn rate is 10%.
Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) is the amount you’re spending to get a new customer. Shopify reported that CAC ranges from $21 to $377, depending on your industry.
If your CAC is higher than your CLV, it means your average customer lifespan is too short to recover what you spent. And you have to double down on your retention game.
How to Calculate Customer Lifetime Value (CLV)
You can find CLV with this formula:
(Average Purchase Value × Purchase Frequency) × Customer Lifespan
A bit confusing? Don’t worry. This isn’t a math class. But we’ll show you how to use it to measure customer lifetime value and share a step-by-step process. Promise, this will be easy to follow.
Basic CLV Computation: Formula Breakdown
Here’s what the term above means:
- Average Purchase Value: How much your customer spends on each order, on average. If a shopper usually checks out with $45 worth of products, that’s their APV.
- Purchase Frequency: How often they buy from you over a set time (usually a year). If someone shops four times a year, that’s their purchase frequency.
- Customer Lifespan: How long they stick around. For e-commerce, this can be from one to five years. If a customer stays loyal for 2 years, that’s their lifespan.
Put them together and you’ll get your CLV.
Step-by-Step: Calculate Customer Lifetime Value for Beginners
You have to grab the following data from your system first: your average purchase value, purchase frequency, and customer lifespan. Feel free to go back to the table above if you need any help with computation.
Then, let’s do the math! If you don’t have the details, you can use mine below:
- One store earned $90,000 from 2,000 orders.
- That gives us an average purchase value (APV) of $45.
- Let’s say they had 500 customers that year.
- So their purchase frequency would be 2,000 orders ÷ 500 customers = 4 times/year.
- And if their average customer stayed loyal for 2 years, that will be $45 × 4 × 2 = $360 CLV.
From this example, every loyal customer brings in $360 over two years.
So, the store owner can spend around $120 on offers like perks, points, or follow-up deals as long as they don’t stretch their budget too thin.
Factors Influencing Customer Lifetime Value
We survived the computation part (yay!). Now, let’s talk about the factors that affect your CLV: product quality and value, customer experience, and brand loyalty.
Product Quality and Value
Your product should be high-quality and valuable enough to solve a problem and satisfy your customer.
One of our clients sold natural soaps and kept getting repeat complaints about the scent fading too fast. They improved their formula and noticed a 2x boost (awesome!) in returning customers within the next few months.
Customer Experience (CX) and Satisfaction
Do you make it easy for people to buy, receive, and enjoy your product? How you handle each touchpoint is also a huge factor.
For example, one store selling pet gear added live chat to help with sizing questions. This tiny change cut their returns in half and got them more five-star reviews (their repeat purchase rate went up, too).
Building Brand Loyalty and Trust
Loyalty grows when customers feel that they matter. Take Oiselle, for example. The women-led athletic brand built a tight-knit community through their Volée run club.
They get early product access, exclusive discounts, event invites, and a space to connect with thousands of other runners. Who wouldn’t love this kind of privilege?
If you want to build the same for your business, try tools like ChannelWill Loloyal. It’s an easy-to-use loyalty app made for Shopify brands that want to grow customer retention.
Easy to customize your brand loyalty program
6 Strategies to Boost Customer Lifetime Value
1. Enhancing Customer Onboarding
Your onboarding process is the first thing your new customer sees after buying. So it better make sense. If it’s confusing or too quiet, they’ll bounce fast.
This is especially important if you sell beauty, wellness, or subscription products. New users usually need some help to get started.
PRO-TIP: Set up a basic email flow that covers three things: how to use the product, what to expect next, and how to earn rewards early on.
2. Fostering Ongoing Customer Engagement
We humans love to be seen. That’s why personalized content works. A simple annual reward or timely product tip can keep your brand top of mind.
What’s more special than being part of a community? Lululemon brings people together through wellness events and group movement sessions. That shared experience becomes a bond that goes beyond the transaction.
Another way to increase your customer engagement is through loyalty programs. And you can create one with tools like Loloyal.
You can set rewards for sign-ups, purchases, reviews, and even social shares. It has VIP tiers too, so your loyal shoppers can get better perks. And that can also convince new ones to keep buying.
Plus, it’s free to start, and you can enjoy more features for only $29/month.
3. Improving Customer Retention
Start with solving small problems before they snowball. Then, ask for feedback and act on it to show that you really listen.
Offering support in different channels (emails, chat, socials, you name it) can also reduce your churn rate. Because people love accessible help. I mean, we all do.
PRO-TIP: Keep a short list of frequent complaints and how you handled them. It helps your team move faster and shows repeat buyers you’re really paying attention.
4. Maximizing Average Purchase Value
Upselling works best when the upgrade feels worth it. One way to do this is to offer a better version of what they’re already eyeing (like a bigger size or a premium pick). Cross-sells are about what goes well with it. Think: a care kit with every shoe order.
HiSmile, a teeth-whitening brand, saw this clearly. They offered a bundle of all their toothpaste flavors to help new buyers test and pick their favorite. That one change led to 4x bigger carts, and 80% of orders now include bundles.
Always remember to check your customer data to see which items get bought together most often.
5. Optimizing Pricing and Offerings
Subscriptions help keep your customers around longer (plus, they remove the “do I really need this?” pause). Tiered pricing also lets you offer value at different spend levels, from casual shoppers to VIPs.
PRO-TIP: Keep testing your price breaks. Even small changes can shift your buyer behavior.
6. Leveraging Technology for CLV Growth
Use your CRM to track who your most valuable customers are. Then set up automations that actually feel personal.
For example, you can send a “personalized” message when they hit their 10th order or a reminder if they haven’t reordered in a while.
PRO-TIP: Set up a segment for your high-CLV customers and check it monthly. It’s usually smaller than you think, but it can bring in the most value.
Measuring and Tracking Customer Lifetime Value
Great! You already know the best strategies to improve your customer lifetime value. Now, let’s talk about how to track it consistently and avoid mistakes that could mess up your numbers.
Setting Up CLV Tracking and Reporting
Start by pulling the right customer data. You’ll need your average purchase value, frequency rate, and customer lifespan. Most brands use a basic spreadsheet to start tracking. n
Once you have that, set a schedule to review your numbers. Monthly is a good start. You want to spot drops and gains early, not six months too late.
Interpreting CLV Trends and Benchmarking
Tracking is one thing. Reading the data is another.
Let’s say your CLV is rising. That’s great, but from where? Are your subscriptions growing? Are your one-time buyers turning into valuable customers?
Look at each customer segment over time. Then compare your numbers to brands in the same niche. But don’t get too caught up in those industry averages. They’re helpful, but your own trends matter more.
Common Mistakes in Customer Lifetime Value Analysis
One mistake we see a lot is using one average CLV across your entire customer base. That flattens real differences between existing customers and first-timers.
Another huge mistake? Ignoring profit. CLV only matters if you’re also looking at how much it costs to get and keep your most valuable customers.
And lastly, don’t jump to conclusions (that’s dangerous!) Just because CLV went up after a loyalty campaign doesn’t mean that was the only reason why. Always analyze and look at the full picture.
Customer Lifetime Value in E-Commerce
Returns affect more than your margins. Let’s look at how they impact customer value and what you can do to lower them.
The Impact of E-commerce Returns on Customer Lifetime Value
Returns hurt more than your profit for the month. Every return costs you shipping, time, and trust.
When those add up, they drag your customer lifetime value down. That’s especially true for stores with high return rates. They often struggle with customer satisfaction and fewer second purchases.
What’s your return rate telling you?
Strategies to Reduce Returns in E-commerce and Improve CLV
Here are some simple ways to reduce returns in your e-commerce store:
- Use customer feedback and real-life photos to guide expectations.
- Answer your customers’ questions as soon as possible.
- Create a detailed return policy that’s fair to your store and your customers.
Conclusion
Customer lifetime value helps you see who’s buying, how often they come back, and how much they bring in over time. It gives your growth efforts the right direction. And that’s why you have to really know it by heart.
Ready to turn one-time shoppers into lifetime customers? Book a demo with our team at Loloyal so we can teach you how to increase your CLV by 35%.
