Customer Lifetime Value (CLV or LTV) is the total revenue a business can reasonably expect from a single customer throughout their entire relationship. It's arguably the most important metric in e-commerce because it determines how much you can profitably spend to acquire and retain customers.
Basic formula: CLV = Average Order Value × Purchase Frequency × Customer Lifespan
Why CLV matters:
- Acquisition budgets: If your CLV is $500, spending $100 to acquire a customer is highly profitable. If CLV is $50, it might be a loss.
- Resource allocation: Focus resources on customer segments with the highest CLV
- Business valuation: Investors look at CLV vs. Customer Acquisition Cost (CAC) as a key indicator of business health
Improving CLV:
- 1Increase AOV: Through bundling, cross-selling, and upselling
- 2Increase purchase frequency: With replenishment reminders, loyalty programs, and personalized recommendations
- 3Extend customer lifespan: By reducing churn through RFM-based re-engagement campaigns
- 4Improve customer experience: Better products, faster shipping, responsive support
CLV and segmentation:
Combining CLV with RFM analysis creates powerful customer segments. Your "Champions" (high recency, frequency, and monetary value) represent your highest CLV customers — they deserve special treatment. Meanwhile, "Promising" segments (good recent behavior but low historical spend) represent your greatest growth opportunity.
