What is the value of acquiring one customer? Many marketing campaigns carefully consider this cost. They total up all the advertising and free perks offered before the customer commits to a paid product. However, once the customer commits, how much is that relationship worth? The customer lifetime value is the sum of all the customer’s purchases over the entirety of the relationship with the company. It can be the total over years.

While it may seem difficult to compute this value, it’s an important metric for evaluating the effectiveness of a marketing campaign. The lifetime value of a customer can influence how much companies decide to spend acquiring a customer. The value shows whether the acquisition cost was worthwhile. The customer lifetime value (or customer LTV) can be used to determine a good marketing campaign budget that balances lifetime value and acquisition cost.

## The Customer Lifetime Value Formula

There are many ways to calculate customer lifetime value. Models range from the complexity of predictive analytics to a simple formula using average values. A formula that relies on averages is shown here.

(Average Value of a Sale) x (The Number of Repeated Transactions per year) x (Length of Relationship in Years)

The lifetime value calculation gives you the revenue from each customer as an average. To get to this number, use the total value of sales over the total number of sales as the average value. The number of repeated transactions per year can be estimated. In the case of a subscription service, this number is simple. A monthly subscription service would be repeated 12 times a year. To calculate a less regular interval, averages are useful. The number of transactions divided by the number of customers over a year will provide a close estimate. Finally, the value of the customer is multiplied by the years in the relationship. This simple customer lifetime value model will give a good estimate of a customer’s value to the company.