Customer lifetime value (or life-time value (LTV), is the average amount of money your customers will spend on your business over the entire life of your relationship.

For example, if a customer continues to buy products or services from your business for 10 years and spends £10 per year, his or her customer lifetime value is £100, minus any money you spent to acquire that customer.

Imagine that you sell underwear from an e-commerce store.

You spend £5 in advertising to attract a customer. He or she buys an average of seven pairs of socks every year for 10 years. Your profit margin on each pair of socks is £10.

Based on this data, you profit £70 per year from the customer, which works out to £700 over the decade. You then subtract the amount of money you spent to acquire the customer, which results in a net customer lifetime value of £695.

That’s a simplistic example, of course, but it demonstrates important data.

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