Customer Lifetime Value Formula, With Worked Examples for Service Businesses

Open the free CLV calculatorDownload the customer lifetime value worksheet (PDF)

The formula

Customer lifetime value (CLV, often shortened to LTV) is what an average customer is worth to you over the whole time they buy from you. For a small business, the version worth using is this:

CLV = average sale × purchases per year × years a customer stays × gross margin

Leave the margin off and you have lifetime revenue. Keep it in and you have lifetime gross profit, which is the number to use when you decide how much you can spend to win a customer. Wikipedia's customer lifetime value article makes the same point in more formal language: the figure is an upper limit on what a business should be willing to pay to acquire a customer relationship.

There is a second way to write the same thing, useful when you know your churn rate rather than how many years customers stay:

CLV = revenue per customer per year × gross margin ÷ yearly churn rate

Dividing by the churn rate is the same as multiplying by the years a customer stays, because a 25% yearly churn rate means customers stay 1 ÷ 0.25 = 4 years on average. Our guide to working out lifespan from churn covers where that number comes from and when the shortcut misleads.

Worked example 1: a dog groomer

A mobile dog groomer looks at last year's bookings. Revenue was $84,000 from 1,200 grooms, so the average sale is $70. Those 1,200 grooms came from 150 different dogs' owners, so the average customer booked 8 times a year. Supplies, fuel and card fees came to 35% of revenue, so the gross margin is 65%. Looking back at the booking history, a typical customer stays about 3 years before moving away or switching.

• Revenue per customer per year: $70 × 8 = $560
• Lifetime revenue: $560 × 3 = $1,680
• Customer lifetime value: $1,680 × 65% = $1,092

So a new regular customer is worth about $1,092 in gross profit. If a local ad campaign costs $150 for each new customer it brings, that is comfortably affordable. If it costs $1,200, every customer it wins loses money, however busy the diary looks.

Worked example 2: a home cleaning service

A cleaning service has a different shape: a bigger and more frequent sale, a thinner margin. A typical customer pays $150 for a clean every two weeks, which is 26 cleans a year. After the cleaner's wages and supplies, the business keeps 45%. Customers stay about 2 years on average, often leaving when they move house.

• Revenue per customer per year: $150 × 26 = $3,900
• Lifetime revenue: $3,900 × 2 = $7,800
• Customer lifetime value: $7,800 × 45% = $3,510

Notice what happens if the owner uses revenue instead of profit: $7,800 makes a $1,000 cost per new customer look trivial, when it is actually more than a quarter of what the customer will ever contribute. That is why the profit version is the one to plan with.

Step by step: get the four numbers from your own records

1. Average sale

Take last year's revenue and divide it by the number of sales: invoices, bookings, orders or visits, whichever you count. Use a full year so seasonal months even out.

2. Purchases per customer per year

Divide the number of sales by the number of different customers who bought in the same year. An export of your invoices or bookings, with duplicates removed, gives the customer count. Our guide to customer lifetime value in Excel and Google Sheets has the formulas for both counts.

3. Years a customer stays

This is the hardest number, and the one that moves the result most. If you have a few years of records, look at customers from two years ago and see how long they kept buying. If you track churn, use 1 ÷ yearly churn rate. If you have neither, pick a cautious guess and label it as one.

4. Gross margin

Revenue minus the direct cost of delivering the work (materials, subcontractors, the wages of the people doing the job, card fees), divided by revenue. Leave out rent and your own salary; those are overheads, not the cost of one more sale.

5. Multiply, and check

Multiply the four together. Then enter the same numbers in the free CLV calculator, which also shows lifetime revenue and, if you add your cost to win a customer, the ratio between the two. The button at the top of this post opens it with the groomer's numbers already filled in.

What the simple formula leaves out

This is the plain version. It does not discount future sales to today's money, which keeps it checkable by hand; the calculator's own notes say the same. If you need a discounted figure, reduce each future year's profit by your discount rate before adding the years up. It also treats every customer as average. If your business has two very different groups, such as one-off emergency jobs and maintenance contracts, work out a CLV for each; an average of the two describes neither.

And it assumes nothing changes. The useful part of knowing the number is changing it: our guide to raising customer lifetime value shows which of the four inputs is usually cheapest to move. Fynl's paid plans keep each customer's jobs, quotes, invoices and emails on one record and can repeat invoices on a schedule, which is how the purchases-per-year number stops depending on memory.

The CLV calculator sits with the NPS, missed-call and no-show calculators on our free tools page.

Questions people also ask

Sources

• Wikipedia — Customer lifetime value
• Harvard Business Review — The Value of Keeping the Right Customers (Amy Gallo, 2014)