Customer Lifetime Value
Calculate and optimize the total value of customer relationships.
Explanation
Customer Lifetime Value (CLV or LTV) represents the total amount of money a customer will spend with your business over their entire relationship. Understanding this number is crucial because it tells you how much you can afford to spend to acquire customers and which customer segments are most valuable to your business.
Real-World Example
SaaS customer pays $50/month, stays average of 24 months, costs $5/month to serve = CLV of $1,080. This means you can spend up to $360 to acquire them (3:1 ratio) and still be profitable. E-commerce customer buys $100 twice per year for 3 years = CLV of $600.
How to Apply
Calculate: Average order value × Purchase frequency × Customer lifespan × Gross margin. Segment by customer type—different segments have different values. Focus acquisition spend on high-CLV segments. Improve CLV by: increasing purchase frequency, raising average order value, extending customer lifespan, or reducing service costs.