The basic customer lifetime value formula is:

CLV = (customer value) x (organization’s average customer lifespan)

The formula tells the organization what the average customer is worth to the business throughout the entire customer lifecycle. There are more complex equations that might consider gross margin, operational expenses, among others.

Step one of the basic CLV model equations is to find the customer value. This requires the organization to find the average purchase cost and average frequency rate of a customer’s purchases, then taking those two numbers and multiplying them. An organization can find that information by looking at e-commerce analytics tools or retrieving an estimate. Another way is to implement a CRM to help ensure and confirm that the data is accurate.

The next step is finding the average number of years that a customer stays active divided by the total number of customers, which will end up being the organization’s customer lifespan. Once the organization has both of those figures, it can then make the customer lifetime value calculation.

Finding the customer lifetime value gets more complicated or less complicated depending on the size of the organization, its products and its business models. There are other formulas to consider when approaching the CLV, and it might be useful to look at the CLV by customer segments.

Identify what drives high CLV and use that information to target high-value customers through bolstered marketing efforts, paid ads and social media.

Identify actions to make less valuable customers more valuable. This might be through a loyalty program or improved customer support.