Customer Lifetime Value (LTV)

Definition

Customer Lifetime Value is the full revenue or profit a typical customer generates over the whole relationship, not a single sale. It tells you how much a customer is really worth, which is the number you should weigh every acquisition cost against.

In depth

LTV looks past the first job to count everything a homeowner is likely to be worth before the relationship ends, repeat projects, change orders, the bath they do two years after the kitchen, and the neighbors they refer. A builder who only counts the opening job will badly undervalue clients who come back, and will refuse to spend the money it actually takes to win them. The longer and more profitable your average relationship, the more a client is worth and the more you can afford to pay to acquire one.

This number sets the ceiling on your marketing. If your average customer is worth $2,000 over their lifetime, a $300 acquisition cost is a bargain even if it looks expensive next to a single $400 sale. LTV is what lets aggressive advertisers outbid cautious ones, they know the second and third purchase are coming, so they can pay more for the first and still profit.

The mistake we see most is judging campaigns on first-purchase revenue alone, which makes patient, high-LTV channels look like losers and rewards cheap, one-and-done traffic. We push clients to estimate LTV even roughly, because a rough LTV beats none, and to revisit it as retention improves. Better retention quietly raises LTV, which in turn unlocks more aggressive, profitable acquisition.

The formula

Worked example

Related terms