In this post I’ll explain a technical but essential idea that many small businesses overlook: the lifetime value of a customer (CLV). Understanding CLV changes how you think about pricing, promotions, and how much you can afford to spend on marketing. Below I break down what CLV is, simple examples, and practical ways to use it in your business.
What is Customer Lifetime Value?
Customer Lifetime Value (CLV) is a metric that estimates how much revenue a customer generates for your business over the entire relationship. It’s not about life-and-death — it’s about how long a customer keeps buying from you and how much they spend during that time.
“When you know how much money a customer will generate, you can know how much you can spend on marketing and promotions.”
Why CLV matters
Knowing CLV helps you make smarter decisions. If you know the average value a customer brings in, you can determine how much you can spend to acquire that customer and still be profitable. Many small business owners balk at marketing costs because they only see the upfront expense, not the long-term return.
Simple example
Let’s walk through a basic example so this feels concrete:
- Imagine a customer spends $200 per month.
- Over 12 months, that equals $2,400 per year.
- If the average customer stays with you for 2 years, the CLV would be $4,800 (2 years × $2,400).
With that CLV ($4,800), spending $200 to acquire the customer is a great investment. Even spending $1,000 on marketing could be profitable if that investment brings in multiple customers with the same lifetime value.
Real-world perspective: trades and services
Think about businesses like construction or home remodeling. A small lead or initial job — remodeling one bathroom — can open the door to larger projects like bedrooms or a kitchen. A single client can become a repeat customer or refer others, turning small marketing investments into much larger returns.
For example, a contractor who lands a $100,000 project after spending a few thousand dollars in advertising is getting significant CLV from that customer relationship. So what looks expensive at first can be reasonable when you consider long-term value.
How to use CLV to set marketing budgets
Follow these steps to apply CLV in your business:
- Calculate average monthly (or yearly) revenue per customer.
- Estimate the average customer lifespan (how many months/years they remain a customer).
- Multiply revenue by lifespan to get CLV.
- Decide what percentage of CLV you’re willing to spend on customer acquisition — this becomes your marketing budget per customer.
Many businesses use a simple rule: if acquisition cost is significantly lower than CLV, the marketing spend is justified. The exact percentage depends on margins, overhead, and growth goals.
Tips to increase CLV
- Improve retention: offer excellent service, follow-ups, and loyalty programs to keep customers longer.
- Upsell and cross-sell: offer complementary services or higher-value packages.
- Focus on referrals: happy customers often bring new customers, increasing the effective CLV of the original client.
- Track data: measure average order value, purchase frequency, and churn to refine your CLV estimates.
Summary and final thoughts
Customer Lifetime Value is a simple concept with big implications. Many small businesses under-invest in marketing because they only see upfront costs. When you calculate CLV, you can spend confidently on customer acquisition and scale more effectively.
If you want help calculating CLV for your business or want examples specific to your industry, leave a comment or suggestion — I make videos and posts on these topics all the time and I’d be happy to cover your questions.
Thanks for reading — Salazar Digital – Marketing & Web Design.
