Customer Lifetime Value
The total revenue a business can expect from a single customer account throughout their entire relationship.
Definition
Customer Lifetime Value (CLV or LTV) represents the total monetary value a customer brings to your business over their entire relationship. It accounts for repeat purchases, subscription renewals, upsells, and referrals.
Calculating LTV involves analyzing purchase frequency, average order value, and customer lifespan. For subscription businesses, it's often monthly revenue times average customer lifespan in months.
Why It Matters
LTV determines how much you can profitably spend to acquire customers. A customer with $5,000 LTV justifies much higher acquisition costs than one worth $500.
Increasing LTV through retention, upselling, and improved experience is often more cost-effective than acquiring new customers. A 5% increase in retention can boost profits by 25-95%.
Examples in Practice
A subscription box company calculates their average customer stays 18 months at $40/month, giving an LTV of $720.
A B2B software company finds enterprise customers have 5x higher LTV than SMB customers, justifying their dedicated enterprise sales team.