Customer Lifetime Value (CLV):

Customer Lifetime Value (also known as lifetime customer value LCV, or life-time value LTV) refers to the value a customer has to a business over the customer’s lifespan as a customer.  If a customer remains a customer for 10 years the CLV for that customer would be the amount of revenue that the customer generated over his/her 10 years as a customer. Typically the CLV is calculated with the profit margin as well so that the CLV is ultimate profit a customer provides to a business. Knowing this number helps identify how much a business can spend to acquire a new customer. If the average cost of acquisition exceeds the average CLV then the business will lose money over time.

A simple equation to calculate CLV is:

t(52 x s x c x p)

  • t = the average lifespan of a customer in years
  • 52 represents the number of weeks in a year
  • s = average spend per visit/transaction
  • c = average number of visits per week
  • p = profit margin

For Starbucks the values come out to:

  • 20 years is the average customer lifespan
  • 52 weeks
  • $5.90 is the average customer transaction
  • The average customer visits 4 times per week
  • After all the costs are calculated the profit margin for Starbucks is .23
  • 20(52 x 5.90 x 4 x .23) = $5645
  • Starbucks can afford to spend $5645 to get and keep a customer and still stay in business.