May 10, 2022

How to Calculate: Customer Lifetime Value Formula (CLV)

How to Calculate: Customer Lifetime Value Formula (CLV)

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When a new customer joins your book of business, there are some things that are known right out of the gate. The 'sale' of a new customer – aka the monetary amount of the contract – is often looked at as the be-all-end-all metric to determine the value of the customer. This number is also used to determine ARR (annual recurring revenue), which shows how much revenue will come in each year from this initial contract.

However, there is an additional metric used by customer success teams (and, more recently, proactive executive leadership teams) to calculate the value of a customer beyond just what is outlined in the initial contract: Customer Lifetime Value (CLV).

What is Customer Lifetime Value

Instead of looking at a customer's one-time, bottom-line value based on contract, Customer Lifetime Value looks at how valuable a customer can be to an organization over time, both in the quantitative and qualitative sense. First, there is the monetary value – looking ahead, what revenue can you predict the customer to bring in throughout their entire relationship with your organization. This includes the initial contract, of course, and any upsells, expansions, and renewals that may occur.

Second, there is the value a customer account can bring outside of traditional revenue. Think about any potential product enhancement requests, advisory board placements, case study potential, customer speaking engagements, etc. As any CSM knows, more goes into a customer than just revenue, and the most valuable customer accounts offer the potential for all of these strategic initiatives.

How to calculate Customer Lifetime Value

With so many different data points informing a metric like Customer Lifetime Value – not to mention that much of this information is forward-leaning and may not be readily on hand – it's easy to assume that calculating Customer Lifetime Value can be tricky. However, with the right formula in hand (and the data to back it up), you can easily calculate Customer Lifetime Value at a customer or company aggregate level.

Here's a good starter formula to begin with:

((total customer revenue per year + total value of non-revenue generating activities) x target lifespan of customer relationship) – operating costs of acquiring and managing the account = Customer Lifetime Value

To come up with each of the points above, you must be able to assign numbers to each data point:

  • Total customer revenue per year: start with the contract value and ARR. Then, think about upsell potential (especially if the customer only purchased a few licenses but has a large user population). Next, add the various opportunities like renewals and expansions that could come next.
  • Total value of non-revenue generating activities: right out of the gate, you should be able to spot marketing opportunities for a customer based on the brand itself. Were any marketing initiatives discussed during the sales process? What about a conference you already know this customer will be perfect for?
  • X target lifespan of customer relationship: you can start with the contract terms outlined, or, if you think renewal is imminent, you can project the total years you plan to serve the customer.
  • Operating costs of acquiring and managing the account: how much does your sales process 'cost'? What about your onboarding, training, and customer success resources? These costs should be subtracted from the overall revenue of the customer.

Ready to Learn More?

You can learn more about customer success metrics and how to calculate Customer Lifetime Value with these additional resources from ClientSuccess:

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