Customer Lifetime Value: How to Work It Out and Why It Matters

If you only look at the first sale, you'll underestimate what a customer is worth, and you'll probably under-spend on winning them. Customer lifetime value (CLV or LTV) is the total profit you expect from a customer over the whole time they buy from you. It's one of the most useful numbers in marketing, and it's easy to work out.

Why it matters

Your marketing budget should be based on what a customer is worth, not what their first order is worth. If a customer spends £60 on their first order but £600 over three years, you can afford to pay a lot more to win them than the first order suggests.

It's also the number that makes performance marketing sensible. You can only decide how much to spend per lead if you know what a lead is worth.

The simple calculation

For most small businesses, this is enough:

Average order value × orders per year × years as a customer × profit margin

An example, with invented numbers:

• Average order value: £50
• Orders per year: 4
• Years as a customer: 3
• Profit margin: 40%

£50 × 4 × 3 = £600 revenue, and 40% of that is £240 profit per customer.

For service businesses

If you sell projects or retainers, use:

Average project value × number of projects (or months) × profit margin

A studio whose clients typically spend £6,000 on a first project and £4,000 on a follow-up, at a 40% margin, has a lifetime value of £4,000 in profit.

What you can do with it

Set your acquisition ceiling

Decide what share of lifetime profit you're happy to spend to win a customer. If a customer is worth £240 in profit and you're willing to spend a third, you can afford about £80 to win one. Then work back to what a lead can cost, as in our guide on how much to spend on Google Ads.

Compare channels

A channel that brings customers who stay for years is worth more than one that brings one-off buyers, even if the second looks cheaper at first.

Spot the value of repeat business

If most of your value comes from repeat orders, an email programme or loyalty offer may be worth more than another ad campaign. See email marketing for small brands.

How to raise it

• Increase repeat purchases. Follow up, remind and make reordering easy.
• Raise average order value. Bundles, add-ons and minimum free-delivery thresholds.
• Extend the relationship. Subscriptions, retainers and ongoing support.
• Improve retention. Fix what makes people leave. A great first experience matters more than another discount.
• Win better customers. Target the people who stay longest, not just anyone who buys.

Common mistakes

• Using revenue instead of profit
• Guessing the lifespan without checking your own data
• Treating all customers as equal, when a few may be worth much more
• Forgetting to count costs such as returns, support and delivery
• Calculating it once and never updating it

What to do next

1. Pull your last 12 to 24 months of orders.
2. Group customers by when they first bought.
3. Work out their average spend over time and the margin.
4. Use the result to set your lead and acquisition targets.

Then review it every quarter. It will move as your business does.

Frequently asked questions

What's a good lifetime value?

It depends on your business. The useful comparison is with what it costs you to win a customer. Aim for a comfortable gap between the two.

What if I don't have much data?

Use rough numbers from the first year and refine them as you collect more. An approximate figure is far better than none.

Can you help us set this up?

Yes, it's part of our performance marketing work. Book a consultation.