Customer lifetime value is an estimate of everything one customer will spend with a business, from their first visit to their last. For a shop it comes from three numbers: what they spend per visit, how many times a year they come, and how many years they keep coming. Multiply the three and you have lifetime sales. Multiply that by your gross margin, the share of each sale left after the cost of the goods, and you have lifetime gross profit, which is the more honest figure to plan with.
The point of the number is perspective. It shows what a customer is worth over years rather than over one sale, and so it shows how much it is sensible to spend keeping them. It is an estimate, and a rough one is enough.
In practice
A deli's ordinary regular spends about $26 a visit, comes about 40 times a year, and tends to stay around four years. Lifetime sales: $26 times 40 times 4, which is $4,160. The deli's gross margin is about 35 percent, so that customer is worth roughly $1,456 in gross profit over their time with the shop.
Now set the loyalty card against it. The deli's card is eight stamps, one per visit, for a free antipasto tub that costs $6 to make. A regular coming 40 times a year fills five cards, so the card costs about $30 a year, or $120 over four years. That is a little over 8 percent of the lifetime gross profit, spent on keeping someone who would otherwise be one bad week away from trying somewhere else.
Lifetime value also shows what churn costs. Losing one of these regulars after a year instead of four gives up about $1,092 of gross profit, the three years that never happen. For the arithmetic done at the counter, see what a regular is worth.