The estimated total revenue or profit a customer generates throughout their entire relationship with your business.
Customer lifetime value estimates the value of a customer relationship over a stated horizon. The label can refer to revenue or to a margin-based value, so a useful report names the version. Revenue-based LTV counts sales; a contribution-based estimate subtracts the specific delivery and servicing costs defined in the model. Neither automatically equals net business profit.
Historical customer spending is observed data. Expected future purchases are a forecast that depends on retention, purchase frequency, pricing and the period covered. Comparing a customer group with five years of purchase history against a new group with three months of history can exaggerate the difference. Use comparable customer ages and separate observed value from projected value.
LTV can inform acquisition planning, but it does not justify unlimited spending to achieve a ranking. A business must also consider how quickly acquisition costs are recovered and whether it can fund the wait. If an estimate already subtracts acquisition costs, subtracting CAC again would double-count that expense. Document the cost boundary rather than relying on the metric’s name.
Takeaway: Use a clearly labeled revenue or contribution estimate before deciding what a new customer is worth.
Example
A maintenance customer is expected to buy three $200 services over two years. Estimated revenue LTV is $600. If the defined variable delivery costs total $360, contribution before acquisition and fixed overhead is $240, not $600.
What to check
Keep the customer group, time horizon, retention assumptions and included costs beside the estimate. Update those assumptions when actual customer behavior differs.
For more detail, see Customer lifetime value.