Glossary
Customer lifetime value is the total profit expected from a customer across the whole relationship, rather than from the first transaction. It sets the ceiling on what acquiring a customer can rationally cost.
A channel that appears expensive against first-order value can be clearly profitable against lifetime value, and businesses that only measure the first transaction systematically underinvest in acquisition, and are outbid by competitors who do the fuller arithmetic.
The most common error is using an optimistic assumed lifespan, which produces a large number that justifies overspending until cash flow disagrees.
Average lifetime value across all customers usually hides a wide distribution, and knowing which segments are worth several times the average is more actionable than the average itself: it tells you who to acquire more of.
Start with average margin per order, multiplied by observed purchase frequency and observed retention period. Use what the data shows rather than an assumed lifespan; optimistic assumptions are how this number justifies overspending.
It sets what you can rationally pay to acquire a customer. Businesses measuring only the first transaction underinvest and lose auctions to competitors who understand the full value.
Customer lifetime value is the total profit expected from a customer across the whole relationship, rather than from the first transaction. It sets the ceiling on what acquiring a customer can rationally cost.
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