Customer Lifetime Value Calculator
Customer Lifetime Value [CLV] is a metric that helps you understand how profitable a brand’s engagement has been with a particular customer over their entire life cycle. Know how to estimate CLV using Salesken’s CLV calculator and determine the appropriate KPIs to track revenue.
What is a Customer Lifetime Value [CLV] in Sales?
Business-to-Business (B2B) organizations deal with multiple customers and it is necessary to evaluate how profitable these customer relationships are. With CLV, organizations can understand how much revenue they have generated from a particular customer over their lifetime and adopt suitable strategies (upsell, cross-sell, sell higher priced products) and improve the CLV.
How to calculate the CLV?
Here’s how marketers can calculate CLV:
CLV = Average Purchase Value X Average Purchase Frequency X Average Customer Lifespan
Here are the steps to calculate CLV:
Step 1: Average Purchase Value
Average purchase value = Total revenue / Total number of purchases
For example, if a business generated $10000 revenue in a month with 25 purchases, the average purchase value will be
Average Purchase Value = ($10000/52) = $400.
Step 2: Average Purchase Frequency
Average purchase frequency = Number of purchases / Number of unique customers
Suppose an organization generated revenue of $10000 from 5 unique customers in a month, and they collectively made purchases worth 25. In that case, the average purchase frequency will be
Average Purchase Frequency = (25/5) = 5 times.
Step 3: Average Customer Lifespan
Average Customer Lifespan = Total customer lifespan / Number of customers
But, if you are a new organization, and do not have enough sample size, you can use churn rate to calculate the average customer lifespan
Life Span = 1 / Churn Rate
Imagine your business had 20 customers at the beginning of a month but only 15 at the end of the same month. The churn rate, in that case, is
Churn Rate = [(20-15) / 20] = 0.25
Hence, the average customer lifespan will be -
Average Customer Lifespan = (1 / 0.25) = 4 months
Step 4: Customer Lifetime Value (CLV)
Average CLV = $400 * 5 * 4 = $8000
Why does CLV matter in sales?
Here is why sales teams must track CLV regularly:
CLV helps you acquire your target customers
CLV paints a clear picture of customers’ purchase intent. It lets you differentiate between a customer who is ready to pay $1000 for a purchase and a customer who is not ready to spend $100. Therefore, sales teams can focus on acquiring customers who fall in the high-margin segment and stop wasting their time and effort to low-quality leads.
CLV leaves a direct impact on your business’s bottom line
Profitability is the bottom line of any business, and CLV plays a huge role there. An organization that solely focuses on converting new customers pays a lump sum every year as the customer acquisition cost.
With CLV, sales, and customer service teams can find loyal customers ready to spend on repeat orders. Hence, sales reps can find new strategies to up-sell/cross-sell additional products to these customers for long-term retention. This, in turn, can boost the profitability of these organizations.
Tips to improve your CLV in sales
Here are 3 tried and tested tips to improve CLV for your business:
1. Interact with your customers regularly
A happy, satisfied customer will engage with your brand for a long time. Regular interaction is a great way to know about your customers and retain them for much longer.
Here are some questions to ask the customers in order to understand their feedback:
- What do they like about your product?
- What do they don’t like about your product?
- How do they like your customer service initiatives?
- What results have they achieved with your product since they engaged with your brand?
With such customer surveys, sales managers and customer success executives will clearly understand how satisfied the customers are and what they need to do to ensure long-term retention.
2. Focus on up-selling/cross-selling
Up-sell and cross-sell are great ways to expand your brand’s revenue. Here’s more about these tactics:
Up-sell is about encouraging customers to opt for an upgraded service. For example, if a customer has opted for a subscription plan worth $10 for software, you can encourage the customer to move to an upgraded version with more features and charge them $30 for it.
Cross-selling is related to focusing on the products and solutions your customer is using now and offering them complimentary products associated with the current product.
Suppose a customer buys a smartphone from your brand and submits a positive review. Your sales team can pitch the same customer to buy a noise-canceling headphone that pairs perfectly with the smartphone. This strategy is called cross-selling.
3. Start reward programs
An innovative way to boost CLV is through reward programs. If you reward the customers each time they purchase from your brand, it will make them feel recognized. Incentives and reward programs are the best ways to win customer appreciation and reduce churn rates. Also, happy customers will refer your product/ services and help in acquiring new customers.
Use our CLV calculator to calculate your customer lifetime value. Determine the total value of each customer with this Excel/Google Sheet template, so you can make informed decisions about customer acquisition, retention, and marketing.
Frequently Asked Questions
A good CLV falls between 3X to 5X of your customer acquisition cost. For example, if a business is spending $100 in acquiring new customers, its CLV should be at least $300 or more.
CLV includes the following three components:
- Constant margin per period
- Constant retention probability per period
- Discount rate
Some of the factors that affect CLV directly are:
- Customer Retention Rate
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