Customer Lifetime Value

Customer lifetime value, often shortened to CLV or LTV, helps businesses understand how much each customer is worth over time, not just from a single purchase.

A simple estimate multiplies the average profit per customer per period by the expected number of periods the customer stays. For example, if a subscription service earns 10 of profit per customer each month and the average customer stays for 24 months, the customer lifetime value is about 240. More detailed calculations also account for the time value of money and changes in spending over time.

Customer lifetime value is most useful when compared with customer acquisition cost, the amount spent to win a new customer. If it costs 80 to acquire a customer worth 240, the business is creating value. If it costs 300, it is losing money on each new customer.

Businesses use CLV to decide how much to spend on marketing, which customers to focus on and how much to invest in keeping customers happy. Increasing how long customers stay, through better service or loyalty programmes, can raise lifetime value significantly.