Definition
Customer lifetime value
Customer lifetime value is the total profit a customer generates across the entire period they remain a customer. It reframes a loyalty reward as an investment against future visits rather than a discount on today’s.
Also called CLV, LTV, lifetime value.
A rough version is enough
Average spend, times visits per month, times months they stay, times your margin. The precision does not matter; the order of magnitude does. A customer spending £4 twice a week for two years at 70% margin is worth around £580 in gross profit, which puts a £3 reward in a very different light from treating it as three pounds off a coffee.
Why it justifies the giveaway
Nearly every objection to loyalty programmes is really an objection to the cost of the reward, argued one coffee at a time. Lifetime value is the frame that makes the argument properly: the question is not what the free coffee costs, it is whether it lengthens the period the customer keeps coming. If it adds three months to an average relationship, the arithmetic is not close.
Where it misleads
It flatters. Averages hide the fact that a small group of regulars produces most of the value, and applying an average to every customer overstates the return on discounting the occasional ones. It also assumes the reward causes the retention, which is the assumption that most needs testing rather than believing.
Questions
- Do I need exact numbers to use this?
- No. An estimate you actually calculate beats a precise figure you never get round to. The purpose is to stop reasoning about rewards as if a visit were the whole relationship.
- How does a loyalty programme change lifetime value?
- Mostly by extending how long someone stays a customer, and slightly by increasing how often they come. Both are visible in repeat rate and visit frequency long before they show up in takings.
Related terms
Repeat rate
Repeat rate is the proportion of customers who return at least once after their first visit. It is the most useful single number for judging a loyalty programme, because it measures the behaviour the programme is meant to change.
Churn
Churn is the loss of customers over time. In hospitality it is rarely announced — nobody cancels a café — so it shows up as a regular whose visits stretch further and further apart until they stop.
Loyalty program
A loyalty program is an arrangement that rewards customers for coming back. In hospitality it usually takes one of two forms: stamps counted per visit toward a free item, or points accrued against how much is spent.
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