In plain words
Customer lifetime value is what one customer is worth over time. For a subscription it is the first order's margin, plus each renewal's margin times the share of subscribers still active when that renewal ships.
It is the number that justifies a first order that earns little. A brand can afford to win a subscriber at a thin first-order margin if the renewals that follow are worth more than the discount. Whether they are depends on two things: what a renewal keeps, and how many a subscriber stays for.
Formula
- LTV over n orders = first-order margin + Σ (renewal margin × share of subscribers still active at that renewal)
- Stated over a horizon, such as twelve months, and before acquisition cost
Worked example
A coffee subscriber's first order keeps $3.79 and each renewal $11.68. With 70% taking the first renewal and the rate settling at 90%, the engine expects 4.24 renewals in twelve months.
That makes the subscriber worth $53.29 over the year, before acquisition cost. A one-time buyer of the same bag is worth $15.36.
The example order
A $40.00 bag of coffee, shipped free, every cost counted
2 declared kinds cost nothing on this option
| Step | Grain | Amount |
|---|---|---|
| Revenue | – | $40.00 |
| Cost of goods | per unit | −$12.00 |
| Pick and pack | per order | −$1.18 |
| Packaging | per parcel | −$0.50 |
| Shipping label | per parcel | −$7.50 |
| Card fee per order | per order | −$0.30 |
| Refunds | percent | −$2.00 |
| Card processing | percent | −$1.16 |
| Contribution margin | – | $15.36 |
| 2 kinds costing nothing | – | $0.00 |
Computed by the margin engine in Offer Suite's own code, in whole cents, from a $40.00 bag of coffee with a $12.00 unit cost.
Lifetime value is not lifetime revenue
A subscriber who pays $400 over a year has not earned you $400. Lifetime value counts what each order keeps after its costs. Stated in revenue it looks several times larger, and it will justify far more ad spend than the customer can repay.
Using it
State the horizon every time: twelve-month value, not an open-ended lifetime. Use margin per order, never revenue. And build it from a renewal curve, not one average retention rate. Most subscribers who leave do so after the first or second order, and a flat rate hides that.
In Offer Suite
For a subscription offer, Offer Suite's simulator projects what a customer is worth over a horizon you choose, per option and blended by the share of customers who take each, before and after acquisition cost.
Source: Offer Suite's offer simulator.