What is customer lifetime value?
Customer lifetime value (CLV or LTV) is an estimate of the total revenue or margin a business can expect from one client over the whole relationship, used to decide how much it makes sense to spend winning and keeping clients.
A simple estimate multiplies average annual revenue per client by gross margin and by the average number of years clients stay. A client worth $3,000 a year at 40 percent margin who stays five years has an illustrative lifetime value of $6,000 in margin. The calculation is rough, but even a rough number changes decisions about marketing spend, onboarding effort and retention.
For many service businesses, the first job is a small part of lifetime value. A homeowner's first furnace repair may lead to a maintenance plan, a replacement system years later and several referrals. A small business's first tax return may lead to bookkeeping and advisory work. Seeing value over the whole relationship explains why onboarding and follow-up deserve investment.
CLV is most useful when broken out by segment, such as service line, referral source or client size. You may find that one marketing channel brings cheaper leads that rarely stay. Calculating it requires reasonably clean data in the CRM and accounting system, including when relationships start and end, which is one more reason data hygiene pays.
Example
For example, a pest control company compares clients by how they signed up. Customers who start on a quarterly plan stay several years on average, while one-time treatment customers rarely return. Using illustrative numbers, the owner estimates plan customers are worth about four times as much and shifts follow-up effort toward converting one-time customers to plans.