Customer lifetime value: what a social customer is worth

Key takeaways

Customer lifetime value (CLV) is the gross profit a typical customer brings over the whole time they buy from you. For a small business, calculate it as average order value times orders per year times years as a customer times gross margin. It tells you how much you can afford to spend winning a follower as a customer.

• CLV = order value × orders a year × years × gross margin.
• Illustrative: £60 × 4 × 3 × 50% = £360 per customer.
• Compare CLV with acquisition cost to set budgets.
• Raise CLV with repeat purchases, not only higher prices.

What is customer lifetime value?

Customer lifetime value (CLV or LTV) is the total gross profit a business can expect from a typical customer over the full length of the relationship. It turns a single sale into the value of the customer, which is what social media and other marketing actually win.

• How UK businesses can turn social media followers into customers

How do you calculate it?

Use four figures from your records: average order value, orders per customer per year, the average number of years a customer stays, and your gross margin. Multiply them. Gross margin matters, because revenue overstates what each customer is worth.

• Coffee shop: £6 × 50 visits × 2 years × 65% = £390.
• Salon: £60 × 6 visits × 3 years × 55% = £594.
• Kitchen fitter: £12,000 × 1 job × 1 year × 30% = £3,600, plus referrals.
• All figures are illustrative.

• Repeat purchase rate: turn first-time buyers into regulars

Why does CLV matter for social media?

CLV matters because it sets how much you can spend to win a customer. If a salon client is worth £594 over three years, spending £60 to win one through social media is sensible even though the first visit only makes £33. Judging social media on first-order profit alone undervalues it for repeat businesses.

• Social media customer acquisition cost: what is a good CAC?
• How to measure social media ROI

What is a good ratio of CLV to acquisition cost?

A commonly used rule of thumb is that CLV should be at least three times acquisition cost, leaving room for overheads and profit. It is a guide from subscription businesses, not a law. Firms with slow payback or tight cash should also check how many months it takes for a customer's profit to repay their acquisition cost.

• Advertising payback period: how long until it pays for itself?

How do you raise customer lifetime value?

Raise CLV by keeping customers longer and helping them buy more often: reminders, follow-up after the first purchase, content for existing customers, a simple loyalty reward and an easy way to rebook. Social media plays a part, because followers who already bought see your posts and come back.

• Social media content for existing customers

What are the limits of a CLV figure?

CLV is an average and a forecast. New businesses do not yet know how long customers stay, and averages hide very different customers. Use conservative assumptions, recalculate yearly, and consider CLV by source: customers from social media may behave differently from referrals.

What does this look like in practice?

A pattern we see with repeat-visit businesses: social media budgets cut because the first visit barely covers the cost of winning it. Working out CLV usually shows the channel is profitable over a year, and shifts the focus to bringing first-time customers back.

• See client work
• Social Media Marketing for UK businesses
• The follower conversion scorecard: find where buyers drop out

CLV checklist

• Find average order value.
• Find orders per customer per year.
• Estimate years as a customer, conservatively.
• Apply gross margin.
• Compare with acquisition cost.
• Recalculate yearly, by source if you can.

Next step

Work out CLV with the four figures today, then compare it with what you spend to win a customer from social media.