Customer Lifetime Value
Definition
The total revenue a customer generates throughout their relationship with your business. Knowing this helps you decide how much to spend acquiring customers.
What is Customer Lifetime Value?
Customer Lifetime Value (CLV or LTV) is the total amount of money a customer will spend with your business over the entire time they remain a customer. It's one of the most important metrics for understanding your business health.
Knowing your CLV tells you how much you can afford to spend acquiring each customer.
How to Calculate CLV
Simple Formula
Average purchase value x Purchase frequency x Customer lifespan
Example:
- Average order: £50
- Orders per year: 4
- Customer stays: 3 years
- CLV = £50 x 4 x 3 = £600
More Accurate Method
Factor in profit margins instead of revenue. A £600 CLV with 30% margins means £180 in actual profit per customer.
Why CLV Matters
Smarter Acquisition Spending
If your CLV is £600, spending £100 to acquire a customer makes sense. Spending £700 doesn't.
Customer Segmentation
High-CLV customers deserve more attention. You might offer them better service, exclusive deals, or personal account management.
Business Valuation
Investors and buyers care about CLV. A business with high, growing CLV is worth more than one with shrinking values.
Increasing CLV
- Improve retention: Keep customers longer
- Increase frequency: Encourage more purchases
- Raise average order: Upsell and cross-sell
- Reduce churn: Fix why customers leave
CLV to CAC Ratio
Compare CLV to your Customer Acquisition Cost. A healthy ratio is at least 3:1. If you're spending more to acquire customers than they're worth, you have a problem.