The estimated total value a customer contributes to a business throughout the entire relationship.
A long-term metric used to guide acquisition, retention, and service investment.
Short and sweet:
The estimated total value a customer contributes to a business throughout the entire relationship.
A long-term metric used to guide acquisition, retention, and service investment.
Lifetime value estimates the total revenue a business can expect from a single customer over the entire span of their relationship, not just from their first purchase, which makes it a useful counterbalance to acquisition cost when judging whether a customer relationship is actually profitable. A business with a relatively high cost to acquire a customer can still come out ahead if that customer’s lifetime value is high enough, which is why the two figures are almost always considered together rather than separately. Improving lifetime value usually comes down to some combination of increasing repeat purchases, upselling, and simply keeping customers around longer through better retention.
A gym member paying $50 a month who stays subscribed for five years represents a lifetime value of roughly $3,000 to that business, far more than the cost of the free trial that first brought them in.
Starbucks understands that a loyal regular grabbing a daily latte is worth this much over time, which is why the company invests so heavily in its rewards app to keep that customer coming back for years.
Subscription businesses like Netflix build their entire growth strategy around this long-term number, willing to spend more acquiring a customer than they’ll earn in the first year because of the years of subscription revenue that typically follow.
