What is customer lifetime value?
TL;DR
Customer lifetime value (LTV or CLV) is the total revenue you expect from a customer over their entire relationship with you. Formula: average order value × purchase frequency × customer lifespan. Knowing LTV lets you set CAC budgets correctly.
Detailed answer
- 1.Formula: LTV = AOV × purchase frequency per year × average customer lifespan in years.
- 2.Example: $50 AOV × 6 purchases/year × 3 years = $900 LTV.
- 3.Healthy ratio: LTV:CAC of 3:1 or better.
- 4.Levers to increase LTV: bigger orders, more frequency, longer retention.
- 5.Most underrated lever: retention (a 5% retention boost can lift profit 25-95%).
Common mistakes
- 1. Not calculating LTV at all (most small businesses don't).
- 2. Treating all customers as one segment instead of by cohort.
- 3. Focusing only on acquisition and ignoring retention.
What to do instead
Calculate LTV by customer segment (new vs. returning, channel of acquisition). The variation is usually huge and informs where to focus.
Invest in retention and advocacy. A customer-marketing program that drives repeat purchases and referrals is the single highest-leverage way to grow LTV.
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