Customer Lifetime Value
Customer Lifetime Value puts a number on what a customer is worth across the whole relationship, not just their next order, so you know how much you can afford to spend to win and keep one.
Purchase history builds toward a single number in the first three boxes, then the last two turn that number into where you actually spend.
Reach for this when…
- You are setting a customer acquisition budget and don't know what a customer is actually worth.
- Some customers get the same service as everyone else despite bringing in far more over time.
- You are deciding whether a retention programme is worth the cost.
How to run it
- Work out average order value and purchase frequency per customer.
- Estimate how long a customer typically stays, by segment if you can.
- Multiply value per period by expected lifespan, then subtract the cost to serve and retain them.
- Segment customers by the resulting CLV, high to low.
- Set acquisition spend and service levels against that segment, not a flat rate.
A worked example
Situation. Yolanda Perez ran Cooperativa Lechera del Cibao, a smallholder milk collection business outside Santiago, Dominican Republic, spending the same sign-up bonus on every new farmer.
Applied. She calculated CLV by farmer segment and found farmers with more than five cows stayed with the co-op three times longer and delivered volume that dwarfed smaller suppliers.
Result. She redirected the sign-up bonus toward larger farmers and added a loyalty top-up for long-standing small ones. Acquisition cost per peso of lifetime value fell within two seasons.
The catch
CLV runs on assumptions about future behaviour built from past behaviour, and those assumptions break the moment a market shifts, a competitor arrives, or a product changes. It also rewards what is easy to count, repeat purchase value, over what is hard to count, like referrals and reputation, so a low-CLV customer who sends you your best clients can look expendable when they are not.
A high-CLV customer you have not delighted this month is a churn risk with a big number attached, not a safe bet.