lifetime value of customer

What is Customer Lifetime Value?

Customer lifetime value (commonly abbreviated CLV, LVC, and CLTV) is an estimate of the earnings that an individual customer is likely to bring to a business over the entire life of that customer.

Why is Customer Lifetime Value Important?

CLV is used in marketing to set an upper limit for marketing spend. It’s also helpful to business owners and marketers during the marketing budgeting process because it frames a company’s marketing investment in a realistic manner. The customer lifetime value formula takes into account the fact that typically, the cost of acquiring a new customer only has to be met once. However, once a prospect becomes a customer, that customer is likely to make repeat purchases over a number of months or years, and hopefully refer new business if they are satisfied. So even though business owners think they should budget $x in November to attract a new customer into their store who will spend $y in December, the business owner should instead be thinking about how much he is really going to earn from that customer over its entire lifetime — not just immediately following the initial marketing investment.

Customer Lifetime Value Formula Example

Let’s take a restaurant’s example of CLV. A business owner knows his December business is always down about 100 visits because of the Holiday schedules of his current customer base. His marketing consultant knows from experience that his client’s average cost to acquire a new customer is $20. Since the business owner wants to get 100 new faces in his restaurant in December, the marketing consultant (who is not a Duct Tape Marketing Consultant) asks if he is willing to budget $20 x 100 = $2000 to run an ad campaign that will fill his tables. The business owner knows on average that he profits $15 on each customer, and calculates that with his consultant’s suggestion, he will spend $2,000 but only pocket $1,500. He fires his marketing consultant for bad judgement.

But the business owner is nearsighted: there’s more to consider than just a single transaction.

Customer LTV Calculator

Lifetime Value of This Customer:


This is a simplistic way to calculate the lifetime value for each of your customers. It can be used to suggest marketing budgets based on your goals.

The business owner is failing to realize that 80% of all new customers come back an average of 6 times per year, and 50% of those people remain customers for at least 5 years. In addition, 30% of those long-time favorite customers refer their friends, funneling even more value to the restaurant owner. When all is said and done, that $2,000 expenditure the owner should have made in acquiring 100 new customers could have earned him tens of thousands of dollars in the long run.

How Do You Calculate Customer Lifetime Value?

Harvard Business School and Wikipedia both point out that there are simple ways to calculate customer lifetime value, and more complicated ways to perform this calculation. The more complex equations take into consideration concepts like:

  • the time value of money
  • variations in customer lifetimes and attrition rates
  • variations in buying patterns based on customer categories
  • customer retention costs

Large businesses sometimes use several different customer lifetime value calculations during their marketing budgeting process, then average them to arrive at their final result. But for most small businesses, a simple LVC formula is best for estimating marketing spend.

The LVC calculation in its simplest form is:

[Average Sales Price – (Your Cost of Goods per Sale + Acquisition Cost )] x Lifetime Number of Sales per Customer

So before you fire your marketing consultant (who is pushing you to increase your marketing budget) and hire a Duct Tape Marketing Consultant (who will always have your best interests at heart), try our Customer LTV Calculator and calculate what that new customer is worth to you.

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