You will be able to estimate customer lifetime value with a simple formula and know its weak points.
After lesson 8.1, Priya knew a new student cost her about S$200 to win. Was that a lot? She had no idea. It depends entirely on what a student is worth, and her first answer, "about S$320 a month in fees", left out the part that matters most: how much of that S$320 she actually keeps.
This lesson works out what a customer is worth over time, starting from margin rather than revenue, and covers where the estimate is weak.
Customer lifetime value, often shortened to LTV, is the gross margin a customer brings you over the whole time they stay a customer. A simple version multiplies four things:
average order value, times orders per year, times years as a customer, times gross margin.
Each input answers a plain question. How much does a typical order or payment come to? How many times a year does a customer buy or pay? How long do customers stay? And of each dollar they pay, how much is left after the direct cost of delivering what they bought?
This is a simplification. It treats every customer as average and ignores the fact that some leave early and others stay for years. For a small business deciding where to spend, that is usually good enough, as long as you remember it is an estimate and keep the inputs visible.
Gross margin is the share of revenue left after the direct costs of what you sold: the stock you bought, materials, delivery, payment fees, and the pay for whoever delivers the service. It is not profit, because rent, software and your own salary still have to come out of it, but it is the money available to pay for winning the customer in the first place.
Using revenue instead of margin is the most common mistake in lifetime value, and it flatters every channel. A customer who pays you S$1,000 and costs you S$700 to serve is worth S$300 towards marketing, not S$1,000.
Priya charges S$320 a month for weekly classes (an example figure). After the tutor's pay, worksheets and the payment provider's fee, her gross margin is about 60 percent, or S$192 a month.
Farah's shop works differently. Her average order is about S$90. After the cost of the clothes, packaging, delivery and payment fees, her gross margin is about 40 percent (again, example figures). Each order leaves her about S$36.
The weakest input is how long customers stay. A business that is two years old cannot know how many customers stay for five. Guessing a long lifetime is how lifetime value turns into a number that justifies any spending.
So use a short horizon you can see in your own data. For most small businesses, the first year is a good choice: what does a new customer bring in margin during their first twelve months? Update it as the business gets older and the data grows.
Priya's records show that new students in their first year pay for about ten months on average, since some leave after a term and a few start mid-year. Her first-year value per student is S$320 times 10 payments times 1 year times 60 percent: S$1,920. Using revenue she would have said S$3,200.
Farah's customers place about 2.2 orders in their first year. Her first-year value is S$90 times 2.2 times 1 times 40 percent: S$79.20. Using revenue, S$198.
Set those beside the acquisition costs from lesson 8.1 and the two businesses look very different. Priya pays about S$200 to win a customer worth about S$1,920 in margin in year one. Farah needs to look much more carefully at her channels, because her customers are worth far less per head in the first year.
An average across all customers hides useful differences. Customers who arrive through different channels often behave differently, and so do customers whose first purchase was different.
Farah split her first-year value by channel, using her shop platform's customer records and the self-reported source answers from module 5. Customers who first found her through Google search averaged S$100 an order and 2.4 orders a year: S$100 times 2.4 times 40 percent, or S$96 in first-year margin. Customers from Meta ads averaged S$75 and 2.0 orders: S$75 times 2.0 times 40 percent, or S$60. Searchers came in knowing what they wanted and bought more of it. Those are example figures, but differences of this kind are common, and they change which channel looks cheapest.
She could also split by first product. Customers whose first order was work trousers may return for more, while customers who bought a discounted scarf may not. A split like that tells you which products to lead with in ads, not just which channels to fund.
Splits need enough customers in each group to mean anything. If a channel brought six customers, its average is mostly luck; note it and wait for more data rather than acting on it.
A lifetime value figure is only as believable as its inputs. Next to each one, write where it came from: "average order value, shop platform, last 12 months", "orders per year, shop platform, customers who joined 12 to 24 months ago", "gross margin, owner's estimate from supplier invoices". Mark estimates as estimates.
That way, when someone challenges the number, you can show the working, and when better data arrives, you know which input to update. Priya's figure took her about half an hour from her enrolment spreadsheet and her accounts. Yours needs real orders from your own records, with each input traced back to where it came from.
Estimate first-year customer value for your business from real orders, showing each input and where it came from.
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