Product Management5 min read2025-07-05

What is Customer Lifetime Value (CLV): Why it matters and How to increase it

In product management, data drives decisions. We look at many numbers, like how many people use our product each month. But these numbers don't tell the whole story. We need to know the long-term value of our customers. This is where Customer Lifetime Value (CLV) comes in.

CLV helps us focus on lasting profit, not just quick wins. If you're a product manager who wants to build great products and grow your business, you need to understand CLV.

What is Customer Lifetime Value (CLV)

Customer Lifetime Value (CLV) is a number. It shows the total profit a company expects from one customer. This covers their whole time with the business.

CLV looks ahead. It considers how much money a customer might bring in. It also considers the cost to get and serve that customer. Simply put, CLV answers this question: "How much is a customer worth to us over time?"

Why is Customer Lifetime Value Important for Business

CLV helps a business make smart choices. It guides different teams, like marketing and sales.

It helps with:

Marketing Spend: CLV shows how much you can spend to get new customers and still make money. This is called Customer Acquisition Cost (CAC).
Improving Customer Retention: High CLV means loyal customers. Tracking CLV helps you keep your most valuable customers.
Informing Sales Strategies: Sales teams can focus on leads that might bring in more money over time. This leads to better deals.
Future Money: CLV helps predict future earnings. This makes financial plans more accurate.

Why CLV Matters for a Product

For product managers, CLV is more than just a marketing number. It's a key tool. It helps shape what features to build and what to focus on. Here's why it's important for product people:

Product Decisions: Look at the CLV of different customer groups. This helps you find what features your best customers like most. You can then build features that keep users engaged and increase their long-term value.
Guides Feature Prioritization: When you have many features to build, CLV can help you choose. Pick features most likely to keep customers and increase how much they spend. This will boost overall CLV.
Validates Product-Market Fit: A rising CLV means your product fits the market well. It shows that customers find value in your product. They also want to keep using it and maybe spend more later.
User Experience (UX): A good user experience makes customers happy and keeps them around. Showing how UX improvements affect CLV helps you get resources for design and usability.

How to Calculate CLV

There are various ways to calculate CLV, ranging from simple to more complex predictive models. Here's a common and relatively straightforward method:

Formula to calculate CLV:

CLV = Average Purchase Value \times Average Purchase Frequency \times Average Customer Lifespan

Where:

Average Purchase Value (APV): This is the average amount of money a customer spends per transaction.

APV = \frac{Total Revenue}{Number of Purchases}

Average Purchase Frequency (APF): This measures how often a customer makes a purchase within a given period (e.g., a year).

APF = \frac{Number of purchases}{Number of Unique Customers}

Average Customer Lifespan (ACL): This is the average duration a customer remains active with your business.

ACL = \frac{Sum of all Customer Lifespans}{Number of Customers}

Once you have these three values, you can multiply them together to get your CLV.

Alternatively, you can also use this common formula:

CLV = Average Customer Value per Period × Average Customer Lifespan

Where:

Average Customer Value per Period = Average Purchase Value × Average Purchase Frequency

Example: Calculating CLV for a Coffee Shop

Let's imagine a local coffee shop, "The Daily Grind," wants to calculate the CLV of its average customer.

Here's the data they've gathered:

Average Purchase Value (APV): Customers typically spend $5 per visit (e.g., a coffee and a pastry).
Average Purchase Frequency (APF): On average, a loyal customer visits The Daily Grind 4 times a week.
Average Customer Lifespan (ACL): The coffee shop estimates that a typical loyal customer remains active for 3 years.

Let's calculate the CLV:

Calculate Average Customer Value per Week: Average Customer Value per Week = APV × APF Average Customer Value per Week = 5×4 visits/week = $20 per week
Convert Average Customer Lifespan to Weeks: Average Customer Lifespan in Weeks = 3 years × 52 weeks/year = 156 weeks
Calculate CLV: CLV = Average Customer Value per Week × Average Customer Lifespan in Weeks CLV = $20/week × 156 weeks = $3,120

So, the estimated Customer Lifetime Value for an average loyal customer at The Daily Grind is $3,120.

This means that over the course of their 3-year relationship with The Daily Grind, an average loyal customer is expected to generate $3,120 in revenue for the business. This powerful insight can help The Daily Grind make strategic decisions, such as how much they should spend on customer loyalty programs or targeted marketing to retain these valuable customers.

Benefits of Using Customer Lifetime Value

Adding CLV to your product plan offers many good things:

Long-Term Focus: Your team will focus on building lasting relationships with current customers, not just getting new ones.
Increased Profitability: When you understand and improve what drives CLV, you directly increase company profit.
Enhanced Customer Segmentation: CLV helps you divide your customers into useful groups. This lets you tailor your product and marketing to each group.
Smarter Decisions: It gives you a clear number to guide important choices, from making new products to running marketing campaigns.

Ways to improve Customer Lifetime Value

Product managers play a big part in boosting Customer Lifetime Value. Here are some good ways to do it:

Enhance Onboarding: A smooth and effective onboarding process helps new users understand the value of your product quickly, increasing the likelihood of long-term engagement.
Improve Customer Service and Support: Excellent customer support fosters loyalty and reduces churn.
Implement a Loyalty Program: Reward your most loyal customers with exclusive benefits and discounts.
Personalize the User Experience: Leverage user data to provide personalized content, recommendations, and offers.
Actively Seek and Respond to Feedback: Show your customers that you value their opinions by actively seeking their feedback and incorporating it into your product roadmap.

Upsell and Cross-sell Strategically:** Identify opportunities to offer your customers additional value through relevant upsells and cross-sells.

Real-World Uses of CLV

Many successful companies use CLV in their main plans:

Use Case	Explanation
Amazon Prime	Amazon offers many benefits for a yearly fee. This makes Prime members buy more often and stay loyal. This greatly increases their CLV. Amazon also uses Prime member data to suggest personalized items, boosting their value even more.
Netflix	Netflix's subscription model is all about CLV. They keep adding new shows and movies. This helps them keep subscribers for a long time, making their lifetime value higher. Their recommendation system is a key feature that keeps users watching and reduces churn.
Starbucks	The Starbucks Rewards program is a great example of using CLV. They give points for every purchase, personalized offers, and easy mobile ordering. This encourages repeat business and increases customer lifetime value. The app data also gives valuable information for new product ideas and marketing.

Conclusion

In today's competitive world, a product's success isn't just about getting users. It's about keeping them and making sure they bring in value over time. Customer Lifetime Value is a key number. It helps product managers look beyond short-term goals. It helps them build products that create loyalty, drive lasting growth, and have a long-term impact on the business. By understanding, figuring out, and improving CLV, you can ensure your product not only helps users but also adds a lot to your company's long-term health and profit.

FAQs

How often should we calculate CLV?

It's good to calculate and check CLV regularly, like every three months or once a year. This helps you see trends. You can also see if your product and marketing efforts are working. Then, you can make changes to your plan.

What is a good CLV to CAC ratio?

A good rule is to aim for a CLV to CAC ratio of at least 3:1. This means you should make at least three dollars in lifetime value for every dollar you spend getting a new customer. A 1:1 ratio means you're just breaking even. A ratio below that means you're losing money on each new customer.

Can CLV be used for products that are not subscriptions?

Yes, absolutely. It's easier to figure out for subscriptions, but CLV is also very useful for online stores, mobile apps, and any business where customers buy repeatedly. The key is to track customer actions over time. This helps you guess how often they buy and how long they stay.

What common mistakes should I avoid when using CLV?

One mistake is using wrong data. This can lead to bad calculations and poor decisions. It's also important not to focus only on the "average" customer. Different customer groups can have very different CLVs. Finally, don't think of CLV as a fixed number. It changes and needs to be watched and improved all the time.