Customer Lifetime Value (LTV or CLV) estimates the total revenue a customer will generate throughout their relationship with a brand. A simple calculation: Average Order Value × Purchase Frequency × Customer Lifespan. A customer who spends $100 per order, orders 3 times per year, and remains a customer for 5 years has an LTV of $1,500.
LTV is crucial for determining sustainable customer acquisition costs and marketing investments. If your LTV is $200, spending $150 to acquire a customer seems reasonable. If LTV drops to $80, that same $150 CAC makes no sense.
Increasing LTV is often more profitable than acquiring new customers. Strategies include improving product quality to drive repeat purchases, implementing subscription models, increasing AOV through upsells and cross-sells, and building loyalty programs that reward retention.