What it means
Take what a customer spends in a typical visit, multiply by how often they come in a year, then by how many years they stay. That is lifetime value. Serious versions use profit rather than revenue, because a customer who spends £1,000 on your lowest-margin line is not worth £1,000 to you.
Why it matters to a small business
For most local businesses this is the number that changes the decision. A first haircut, a first coffee or a first dog groom rarely covers the cost of winning that person. It is the second year that pays. Owners who only ever look at the first sale conclude that marketing does not work, when what has actually happened is that they measured a three-year relationship on day one.
A barber charges £22 a cut, a regular comes about seven times a year, and regulars tend to stay around three years.
£22 times 7 times 3
About £460 of revenue. Suddenly spending £40 to win one looks less reckless and more like arithmetic.
The bit people get wrong
Do not use an average across everybody. Lifetime value is nearly always lopsided, with a small group of regulars worth many times the median, and the average sits somewhere neither group recognises. Work it out for the kind of customer you are actually trying to win more of.