Customer lifetime value is the total profit one customer brings while they stay with you: average bill × margin × visits a year × years retained. The figure tells you how much you can afford to spend winning a customer, and what you genuinely lose when one leaves.
Why you need this figure at all
Because every marketing decision you make already depends on it without your knowing. When you ask "should I spend thirty riyals to win a customer?" you are implicitly asking whether that customer is worth more than thirty. Without the figure the answer is a feeling, and feelings in this particular spot always err low.
Customer lifetime value for small shops needs no accountant: average bill × margin × annual visits × years retained. Four numbers, all of them either already in your till or estimable with reasonable confidence.
| Element | Value | Source |
|---|---|---|
| Average bill | 22 riyals | From the point-of-sale system |
| Margin | 65% | Price minus item cost |
| Visits a year | 48 | 4 a month × 12 |
| Years retained | 2.5 years | A conservative estimate |
| Lifetime value | 22 × 0.65 × 48 × 2.5 | 1,716 riyals |
One thousand seven hundred riyals. That is what you lose when a single customer stops coming, and it is the figure that puts an argument at the till over a six-riyal stamp into its true proportion.
Three immediate uses for the number
- A ceiling on customer acquisition spend The common rule is to spend no more than a fifth of lifetime value winning a customer. At 1,716 that ceiling is about 340 riyals — far higher than most merchants dare imagine.
- The reward size you can carry A reward costing six riyals every six visits is about forty-eight riyals a year, under three per cent of lifetime value. That is not extravagance, it is cheap insurance.
- The price of losing an argument at the counter A cashier disputing a doubtful stamp might save six riyals while risking 1,716. That alone justifies authorising staff to accept whatever the customer says.
The third use is the fastest-acting and the cheapest. Write it on a card inside the till: "when in doubt, give the stamp." That one sentence protects a four-figure number with six riyals.
The variable that moves everything: years retained
Of the four elements, three are hard to shift much. Average bill rises slowly, margin is governed by your costs, and visit frequency is capped by the nature of your trade. Years retained is the one variable a reward programme can genuinely multiply.
The gap between those last two rows is the whole point. Extending retention by eighteen months gives you more than double what an extra monthly visit gives, and it is cheaper too, because it does not require the customer to change a habit — only to keep one.
Mistakes that make the figure lie to you
Calculate it like this
- Use margin, not revenue — revenue gives you an inflated figure with no meaning.
- Estimate retention conservatively; exaggeration here inflates everything downstream.
- Work it out per segment when your segments differ sharply.
- Review it annually, because your average bill and margin both move.
Do not
- Do not use one average that blends a daily regular with an annual visitor.
- Do not assume ten years of retention for a shop that is one year old.
- Do not put rent and wages into it; neither changes for one customer.
- Do not base a large decision on a figure you last checked two years ago.
The most important entry there is the first on the right. A single average across all customers hides the real spread: in most shops the top fifth are worth several times the rest combined. Work out their own figure separately, because protecting them is an entirely different priority.
Common questions
My shop is new. How do I estimate retention?
Start with one year as a conservative assumption and calculate on that, then correct it after a year with real data. A value based on one year is entirely adequate for small decisions such as reward size, and inadequate for large ones such as an expensive acquisition campaign.
Does the figure differ between new and long-standing customers?
Enormously. Somebody who has stayed two years is far more likely to stay a third than a new customer is to reach a second month. Which is why spending on retaining the established usually returns more than spending on acquiring the new, in most small shops.
How does a reward programme raise it?
Through three of its four elements at once: it increases visits because a cycle gives a reason to return, it extends retention because an accumulated balance makes leaving a loss, and it lifts the average bill slightly because a cardholder buys with more confidence. Margin is the only element it does not touch.