Customer Lifetime Value (CLV)

Definition

Customer lifetime value (CLV, also written LTV) is the total a typical customer spends with you over the whole relationship. For a local service business it comes down to three numbers you already have somewhere in your scheduling or invoicing system: what a visit or job bills, how many times a year the customer comes, and how many years they stay.

Revenue CLV counts what the customer pays. Profit CLV counts what is left after the cost of serving them: materials, the technician’s time, the chair. When you are deciding how much to spend winning someone back, profit is the number to use.

The formula

“Years as a customer” is the hard one. Use the typical stay for customers like the ones you are about to mail, not the ten-year regulars everyone remembers. If you have never measured it, start with a number you can defend and tighten it after a season of real data.

A worked example (illustrative)

Using CLV to decide what a lapsed customer is worth mailing for

For postcards the question is not “what is my average customer worth?” It is “what can I spend to bring one lapsed customer back and still come out ahead?” Four steps get you there.

1. Set the ceiling at year-one profit. If you come out ahead on the first twelve months alone, years two and three are a bonus. In the groomer example the ceiling is $280 per customer who returns.
2. Add up what the campaign really costs. Cards, the plan fee, and the front-desk time on the phone. Say the groomer mails 400 lapsed customers three times: 1,200 cards at $0.91 is $1,092, three months of Pro is $297, and 20 hours of calls at an assumed $25 an hour is $500. Total: $1,889.
3. Divide by the customers who come back. If 5% of the 400 return (an assumption, not a promise), that is 20 customers and about $94 each, well under the $280 ceiling.
4. Stress it. Halve the response and 10 customers return at about $189 each, still under the ceiling. The campaign only loses money below roughly 7 returning customers, under 2% of the list.

The same arithmetic tells you whether a third wave is worth mailing: divide the wave’s cost by the extra customers it brings back, and compare to the same ceiling. You do not have to guess; you read it off your own results from the first two waves.

One caution. A customer who lapsed and came back is not an average customer. They may stay a shorter time than someone who never left, so use a shorter “years” figure for them, or stick with year-one profit and treat the rest as upside.

Common mistakes

• Using revenue where profit belongs. A $70 groom is not $70 in your pocket.
• Averaging in your best customers. The decade-long regulars inflate “years as a customer” and make every campaign look better than it is.
• Folding years you have not seen into the headline ROI. Report year-one return and lifetime upside as two separate numbers.
• Crediting the card for customers who would have come back anyway. The postcard marketing ROI guide shows how a small holdout group keeps you honest.

Related terms

• Return on Investment: campaign revenue against campaign cost, the ratio CLV feeds into.
• Break-Even Response Rate: the smallest response that covers the cost, found by dividing cost by what a customer is worth.
• House List: your own customers, the list where CLV is easiest to measure.
• Reactivation Campaign: the kind of mailing where the lapsed-customer math above applies.
• Win-Back Campaign: for customers who left on purpose, who usually need a stronger reason to return.

Related on PostKnock: how to calculate postcard marketing ROI, including what to count on the cost side, and the free ROI calculator for your own numbers.

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