Glossary
What is customer lifetime value?
Customer lifetime value is the total revenue a business expects from one customer across the whole relationship, rather than from a single transaction.
Lifetime value reframes what a loyalty reward costs. Giving away a free coffee looks like a loss on that transaction and is usually a gain across the relationship, because it extends how long the customer keeps returning. The practical test is whether the reward's cost is smaller than the additional margin from the visits it produces.
How is lifetime value calculated for a small business?
Multiply the average transaction value by the visits per period and by the number of periods a customer typically stays. For a café customer spending €6 twice a week for two years, that is roughly €1,250.
Use gross margin rather than revenue if you intend to compare it against acquisition or retention spend, otherwise the figure flatters every decision made with it.
Why does it matter for loyalty?
Because it reframes the reward. A free coffee costing under a euro, given to retain a customer worth over a thousand, is not a discount: it is one of the cheapest retention instruments available.
It also reframes churn. Losing one weekly regular is not the loss of one visit; it is the loss of the remaining lifetime, which is why noticing an absence early is worth more than any single promotion.
What is the most common mistake?
Costing rewards at menu price instead of marginal cost. Businesses that model loyalty with retail prices routinely conclude it is unaffordable when the true cost is a fraction of what they calculated.
See also
- Retention rate: Retention rate is the proportion of customers from one period who return in the next, and even a small increase compounds substantially over a year.
- Customer retention: Customer retention is the share of customers who return to a business over a given period, and it is usually far cheaper to improve than customer acquisition.
- Points expiry: Points expiry is the rule that unused loyalty progress lapses after a set period, and it should be set from how often the business's own customers buy rather than copied from a larger scheme.
- Loyalty tiers: Loyalty tiers are levels within a programme that unlock better benefits as a customer spends more, and they only mean anything once enough customers sit in each level for the distinction to be visible.
- Redemption rate: Redemption rate is the share of earned rewards that customers claim, and a low rate is a warning rather than a saving: it usually means the threshold is too high or the reward is not wanted.
Further reading
How to calculate customer lifetime value for a small business
A simple, defensible way to work out what a customer is worth over their whole relationship with you, and what to do with the number once you have it.
How to measure repeat customer rate (and what to do with it)
The formula for repeat customer rate, the window to measure it over, what a good figure looks like by industry, and the two numbers that are more useful.