A step by-step guide to calculating customer lifetime value
1. A Step-by-step Guide
to Calculating
Customer Lifetime
Value (CLV)
Prepared by: Geoff Fripp, Adjunct Marketing Lecturer
The University of Sydney
http://www.clv-calculator.com/
2. What is Customer Lifetime Value?
• Customer lifetime value is a measure of customer
profitability over time
• CLV can be defined as “a measure of a customer’s
aggregate profit to the firm over the total time that the
customer deals with the firm”
• CLV is calculated as a single dollar number, which
summarizes the net profit/loss position of the customer’s
total relationship with the firm
• It is calculated on per customer basis, but is more usually
determined for an the average customer within a
particular market segment
• A firm will calculate multiple CLV’s for different customer
segments
4. The Simple CLV Formula
THE FORMULA
Annual profit contribution per customer X
Average number of years that they remain a customer
Less the initial cost of customer acquisition
WHAT INFORMATION DO WE NEED?
1. Initial cost of customer acquisition
2. Annual profit contribution per customer
3. Average customer retention rate
5. The CLV Calculation
We start with this
information
We need to calculate
this information
6. CLV Calculation: Step One
Average Acquisition Cost 500
Average Customer Profit pa 1000
Customer Retention Rate 75%
Customer Churn Rate 25%
Average Lifetime in Years ???
Simple CLV ???
Churn rate is 1 –
retention rate
NOTE: Retention rate and churn
(loss) rate always add to 100%
7. CLV Calculation: Step Two
SIMPLE CLV
Average Acquisition Cost 500
Average Customer Profit pa 1000
Customer Retention Rate 75%
Customer Churn Rate 25%
Average Lifetime in Years 4
Simple CLV ???
Average lifetime in
years is 1 / churn rate
That is, the number of times
the churn rate goes into 100%
8. CLV Calculation: Step Three
CLV is time/years X
annual profit –
acquisition cost
SIMPLE CLV
Average Acquisition Cost 500
Average Customer Profit pa 1000
Customer Retention Rate 75%
Customer Churn Rate 25%
Average Lifetime in Years 4
Simple CLV 3,500
EXAMPLE: 4 X $1,000 - $500
9. The Complete CLV Formula
THE FORMULA
Annual profit contribution per customer (for each year) X
The customer retention rate (for each year) less
The initial cost of customer acquisition
With each year adjusted by an appropriate discount rate
WHAT INFORMATION DO WE NEED?
1. Initial cost of customer acquisition
2. Annual revenue contribution per customer
3. Annual direct costs per customer
4. Annual customer retention rate
5. The discount rate to be used
10. Full CLV Calculation: Start
COMPLETE CLV Year 0 1 2 3 4 5
Average Acquisition Cost 500
Average Customer Revenue 500 1,000 1,500 2,000 2,500
Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit ??? ??? ??? ??? ???
Customer Retention Rate 100% 60% 65% 70% 75%
Cumulative Retention Rate ??? ??? ??? ??? ???
Likely Customer Profit ??? ??? ??? ??? ???
Discount Rate 1 1.10 ??? ??? ??? ???
CLV - per year ??? ??? ??? ??? ??? ???
Cumulative CLV ??? ??? ??? ??? ??? ???
We need to START with the figures in BLUE and we need to
CALCULATE the figures in YELLOW
Customer Lifetime Value will be in the bottom-right GOLD cell
11. Full CLV Calculation: Step One
COMPLETE CLV Year 0 1 2 3 4 5
Average Acquisition Cost 500
Average Customer Revenue 500 1,000 1,500 2,000 2,500
Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit 200 400 600 800 1,000
Customer Retention Rate 100% 60% 65% 70% 75%
Cumulative Retention Rate ??? ??? ??? ??? ???
Likely Customer Profit ??? ??? ??? ??? ???
Discount Rate 1 1.10 ??? ??? ??? ???
CLV - per year ??? ??? ??? ??? ??? ???
Cumulative CLV ??? ??? ??? ??? ??? ???
Average customer profit each year is simply average customer
REVENUE less average customer COSTS
12. Full CLV Calculation: Step Two
COMPLETE CLV Year 0 1 2 3 4 5
Average Acquisition Cost 500
Average Customer Revenue 500 1,000 1,500 2,000 2,500
Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit 200 400 600 800 1,000
Customer Retention Rate 100% 60% 65% 70% 75%
Cumulative Retention Rate 100% 60% 39% 27% 20%
Cumulative retention rate is the compounding effect of losing customers
We start with 100% of customers and we keep 60% in year 2. In year 3 we
Likely Customer Profit ??? ??? ??? ??? ???
Discount Rate 1 1.10 ??? ??? ??? ???
keep 65% of those remaining, which is 65% of the 60% = 39%
CLV - per year ??? ??? ??? ??? ??? ???
Cumulative CLV ??? ??? ??? ??? ??? ???
Cumulative retention rate indicates the % probability of receiving the
customer’s business (revenues and costs) in future years
13. Full CLV Calculation: Step Three
COMPLETE CLV Year 0 1 2 3 4 5
Average Acquisition Cost 500
Average Customer Revenue 500 1,000 1,500 2,000 2,500
Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit 200 400 600 800 1,000
Customer Retention Rate 100% 60% 65% 70% 75%
Cumulative Retention Rate 100% 60% 39% 27% 20%
Likely Customer Profit 200 240 234 218 205
Discount Rate 1 1.10 ??? ??? ??? ???
CLV - per year ??? ??? ??? ??? ??? ???
Cumulative CLV ??? ??? ??? ??? ??? ???
Likely customer profit each year = Average Customer Profit (in
row 3) X Cumulative Retention Rate (% probability of the
customer still buying from our firm)
Example for Year 3: $600 X 39% = $234
14. Full CLV Calculation: Step Four
COMPLETE CLV Year 0 1 2 3 4 5
Average Acquisition Cost 500
Average Customer Revenue 500 1,000 1,500 2,000 2,500
Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit 200 400 600 800 1,000
Customer Retention Rate 100% 60% 65% 70% 75%
Cumulative Retention Rate 100% 60% 39% 27% 20%
Likely Customer Profit 200 240 234 218 205
Discount Rate 1 1.10 1.21 1.33 1.46 1.61
CLV - per year ??? ??? ??? ??? ??? ???
Cumulative CLV ??? ??? ??? ??? ??? ???
Future discount rates are compounded on a yearly basis
In this case, the discount rate is 10%
Future years are 1.1 X 1.1 = 1.21 X 1.1 = 1.33, and so on
15. Full CLV Calculation: Step Five
COMPLETE CLV Year 0 1 2 3 4 5
Average Acquisition Cost 500
Average Customer Revenue 500 1,000 1,500 2,000 2,500
Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit 200 400 600 800 1,000
Customer Retention Rate 100% 60% 65% 70% 75%
Cumulative Retention Rate 100% 60% 39% 27% 20%
Likely Customer Profit 200 240 234 218 205
Discount Rate 1 1.10 1.21 1.33 1.46 1.61
CLV - per year -500 182 198 176 149 127
Cumulative CLV ??? ??? ??? ??? ??? ???
Contribution to CLV on a yearly basis is the “likely customer
profit” divided by the discount rate
For example, in year 3: profit = $234 / 1.33 = $176
16. Full CLV Calculation: Step Six
COMPLETE CLV Year 0 1 2 3 4 5
Average Acquisition Cost 500
Average Customer Revenue 500 1,000 1,500 2,000 2,500
Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit 200 400 600 800 1,000
Customer Retention Rate 100% 60% 65% 70% 75%
Cumulative Retention Rate 100% 60% 39% 27% 20%
Likely Customer Profit 200 240 234 218 205
Discount Rate 1 1.10 1.21 1.33 1.46 1.61
CLV - per year -500 182 198 176 149 127
Cumulative CLV -500 -318 -120 56 205 332
Cumulative CLV is the running total of CLV per year
Our key CLV figure is in the GOLD cell = $332
17. Full CLV Calculation: Outcomes
COMPLETE CLV Year 0 1 2 3 4 5
Average Acquisition Cost 500
Average Customer Revenue 500 1,000 1,500 2,000 2,500
Average Customer Costs 300 600 900 1,200 1,500
Average Customer Profit 200 400 600 800 1,000
Customer Retention Rate 100% 60% 65% 70% 75%
Cumulative Retention Rate 100% 60% 39% 27% 20%
Likely Customer Profit 200 240 234 218 205
Discount Rate 1 1.10 1.21 1.33 1.46 1.61
CLV - per year -500 182 198 176 149 127
Cumulative CLV -500 -318 -120 56 205 332
CLV = $332 – which is a positive number – which is great
This means that the $500 acquisition cost has generated good profits
for the firm
As a 10% discount rate has been used, the ROI on the marketing
investment is MORE than a 10% return
Payback on customer acquisition costs is delivered in Year 3
18. For lots more information…
Please visit www.clv-calculator.com
On this website you will find:
• A free Excel spreadsheet for calculating
CLV as shown in this presentation
• Quick CLV calculators
• Lots of CLV information and examples
• Plus instructional videos
http://www.clv-calculator.com/
