Customer lifetime value

Customer lifetime value is an estimate of the total profit a company expects to earn from a single customer over the entire time that customer keeps buying from it. Rather than looking at one purchase or one billing period in isolation, it projects forward across the whole relationship, capturing repeat purchases, subscription renewals, and upsells along the way.

A simplified version of the formula is:

Lifetime value is most meaningful when weighed against customer acquisition cost. A company that spends little to acquire a customer but earns that customer's business for years generates far more value per customer than one that spends heavily to acquire customers who churn quickly. Investors look at the ratio between the two, sometimes expressed as lifetime value divided by acquisition cost, as a gauge of how efficient and durable a company's growth actually is.

Lifetime value depends heavily on assumptions about how long a customer will stick around and how much they'll spend, which makes it more of an estimate than a precise figure, and companies with different definitions or time horizons can produce numbers that aren't directly comparable to each other. It's most useful as a way to judge the underlying economics of a subscription or repeat-purchase business, and to see whether that ratio to acquisition cost is improving or deteriorating over time.