Customer lifetime value

Customer lifetime value is what one customer is worth to you across the whole relationship rather than on the order in front of you. It turns a single sale into the beginning of a series, and it is the number that decides whether winning a customer was expensive or cheap.

In short

• The total worth of a customer, not the value of one order.
• Order value, times purchases per year, times years retained.
• Use profit rather than revenue or the figure flatters you.
• Averages hide the small group of customers carrying most of it.

The arithmetic, kept simple

You do not need a model. You need three numbers you can already estimate, and a willingness to accept a rough answer.

Start with your average order value. Multiply it by how many times a typical customer buys in a year. Multiply that by how many years a customer usually stays with you. A customer who spends the same amount three times a year for two years is worth six orders, not one.

That is the whole idea, and stated in that form it does something useful immediately. A business selling once is competing for every sale from a standing start. A business whose customers return six times is working for the first sale only, and everything after that arrives on the strength of the delivery, the product and the follow up.

Use profit, not revenue

Revenue based lifetime value is the version that gets quoted and the version that misleads.

Two customers can produce identical order values while one buys the products you make most on and the other buys the ones you barely break even on. On a revenue calculation they are equals. On a margin calculation they are not close, and the difference decides which of them you should be trying to attract more of. Apply your gross margin before multiplying, and treat delivery and payment handling as part of the cost of serving them.

Do the same with returns. A customer whose orders come back is worth less than one whose orders stay sold, and in a market where cash on delivery is common, the gap between orders placed and orders paid is large enough to change the answer outright.

The average is hiding something

Lifetime value calculated across every customer at once is usually the least useful version of the number.

Most stores find that a small share of customers accounts for a large share of value, and the average sits somewhere between two groups that behave nothing alike. Split it and the number starts giving instructions. Split by the first product somebody bought, because certain products bring people who return and others bring people who never come back. Split by how they found you, because customers arriving from search often behave differently from customers arriving from a promotion.

That second split is the one to do first. It tells you which acquisition route is producing customers rather than orders, and those are frequently not the same route.

What actually moves it

Three levers move lifetime value, and they are in ascending order of difficulty.

The first is a second purchase from someone who already bought. It is the cheapest sale in the business, and it sits beside the other one most stores never collect, which is the basket recovered after cart abandonment. A store with no contact after delivery is leaving this untouched, and an email flow triggered by a first order is the standard way of picking it up. The second is order size, which average order value covers in its own right. The third is retention, meaning how long people stay, and that is mostly built from things no campaign touches: whether deliveries arrive when promised, whether messages get answered, and whether the product is what the page said it was.

Nothing on that list is a marketing trick, which is the honest conclusion of the whole calculation. Lifetime value is the number that shows what happens after the sale, and most stores spend all their attention on what happens before it.

What the number is for

A figure that changes nothing does not deserve the effort, so it is worth being clear about which decisions this one touches.

It decides how hard the first sale is worth working for. A business whose customers return several times can put real effort into winning somebody once, because the first order is an introduction rather than the whole relationship. A business selling once has to make that sale pay for itself, and campaigns that make sense for the first business are reckless for the second.

It also decides which products deserve the attention. The product that brings people back is more valuable than its own margin suggests, and the one that sells well to people who never return is worth less than it looks on the report. Ranking products by lifetime value rather than by conversion rate tends to reorder the list.

What it should not do is travel. A lifetime value figure from another business, or an industry average from an article, describes their customers and their margins. Use your own, roughly calculated, over your own history.

Words you will hear

• Repeat purchase rate. The share of customers who buy more than once. The single most useful supporting number.
• Cohort. A group of customers who first bought in the same period, tracked together over time.
• Gross margin. What is left from a sale after the cost of the goods, before overheads.
• Churn. The rate at which customers stop coming back, borrowed from subscription businesses.
• Historical and predicted. One measures what customers have already been worth, the other forecasts it. The first is enough for most stores.