Should CLV use revenue or profit?

Profit is more useful for decisions, because revenue ignores product, shipping and fee costs. A customer who spends a lot on low-margin items may be worth less than one who spends less on high-margin products. Many stores track both.

How long a period should I use for CLV?

Pick a window that fits how often customers buy, often 6, 12 or 24 months. Shorter windows are more reliable for young stores and for planning ad spend, since you get paid back sooner and rely less on long-term guesses.

Customer lifetime value (CLV)

Customer lifetime value (CLV) is the total revenue or profit a store expects from one customer across every order they place over the relationship.

What is customer lifetime value?

Customer lifetime value, often called CLV or LTV, estimates how much one customer is worth to your store over all the orders they will place, not just the first one. It can be measured as revenue or, more usefully, as profit. CLV matters because it tells you how much you can afford to spend to win a customer. A store whose customers reorder every month can pay far more for the first sale than a store whose customers buy once. Knowing CLV also shows whether retention work, like emails and subscriptions, is paying off over time.

How to calculate customer lifetime value

A simple way is to multiply average order value by the average number of orders per customer over a chosen period, then multiply by your gross margin to get profit. For example, if the average order is $50 and customers place 3 orders on average over two years, lifetime revenue is 50 times 3, which is $150. If your gross margin after product and shipping costs is 40%, lifetime gross profit is 150 times 0.4, which is $60. Use real order data grouped by when customers first bought, and choose a fixed window, such as twelve months, so the number is comparable over time.

What is a good customer lifetime value?

A good CLV is one comfortably higher than what it costs to acquire a customer. A widely used rule of thumb is a ratio of lifetime value to acquisition cost of about 3 to 1, though what works typically varies by niche, cash position and growth goals. Products that people use up and reorder, like coffee, supplements or pet food, usually have much higher CLV than one-off purchases such as furniture. Because of that, compare your CLV to your own acquisition cost and margin rather than to other stores, and track whether newer customer groups are worth more or less than older ones.

How to improve customer lifetime value

Deliver a great first order, since customers who have a bad experience rarely return. Send helpful post-purchase emails that explain how to use the product and when to reorder. Offer subscriptions or easy reorders for products people use up. Recommend relevant follow-up products based on what each customer bought. Reward repeat buyers with genuine perks rather than constant discounts that train people to wait for sales. Make customer service quick and easy, and fix the common reasons for returns. Finally, measure CLV by acquisition channel, because some ads bring customers who come back far more often.

Customer lifetime value vs customer acquisition cost

Customer lifetime value is what a customer is worth to you over time, while customer acquisition cost, or CAC, is what you pay to win that customer in the first place. CLV looks forward at all future orders, and CAC looks at marketing spent to get the first one. The two only mean something together. A $40 CAC is a problem if customers are worth $30 in profit, but fine if they are worth $120. Comparing them shows how much room you have to grow ad spend profitably. Track both numbers for each ad channel, not only for the store as a whole.

Questions

Should CLV use revenue or profit?: Profit is more useful for decisions, because revenue ignores product, shipping and fee costs. A customer who spends a lot on low-margin items may be worth less than one who spends less on high-margin products. Many stores track both.
How long a period should I use for CLV?: Pick a window that fits how often customers buy, often 6, 12 or 24 months. Shorter windows are more reliable for young stores and for planning ad spend, since you get paid back sooner and rely less on long-term guesses.