Introduction
Many entrepreneurs in retail primarily look at revenue and margin per product when examining their figures. This is understandable, but it provides a limited view. The true profitability of a business is not only determined by what is sold today, but especially by the value that a customer generates over the entire relationship with your company. This value is referred to as Customer Lifetime Value (CLV).
CLV is often dismissed as a marketing term, used to justify campaigns or loyalty programmes. In reality, it is a financial metric that belongs in accounting and management reports. It concerns the total contribution of a customer: the revenue they generate over time, minus all costs required to serve that customer — from fulfilment and returns handling to customer service and payment processing — and adjusted for the time value of money.
For you as an entrepreneur, this is crucial steering information. CLV shows which customers or segments are truly profitable and which are not. Large consulting firms such as PwC and KPMG emphasise that companies integrating CLV into their financial processes are better able to create budgets, assess investments, and calculate growth scenarios. While revenue only highlights the short term, CLV provides insight into the sustainable value of your customer base.
In this article, I explain what CLV entails, how to calculate it, and how you can use it as a retailer to make better financial decisions.
1. Definition in financial terms + core formula
Customer Lifetime Value (CLV) is essentially a financial metric that represents the net revenue of a customer relationship. It is not just about the revenue generated by a customer, but the total income minus all costs that can be directly attributed to that customer, over the entire relationship. This includes costs for fulfilment, returns processing, payment transactions, customer service, and marketing (acquisition costs). Since this value extends over multiple years, CLV is typically calculated based on the present value: future profits are discounted to their value today.
The classical definition, as often used in academic research and by consulting firms, is as follows:
CLV = Σ (contribution margin per period × retention probability per period) / (1 + discount rate)^t – acquisition costs
In practice, this formula is often simplified to a steady-state approach, where the CLV is expressed as:
CLV ≈ (average margin per customer × retention) / (1 + discount rate – retention) – CAC
whereby:
Margin per customer = revenue minus direct costs in a period (e.g. per month or per year).
Retention (p) = the probability that a customer remains active in the next period.
Discount factor (r) = the correction for the time value of money.
CAC (Customer Acquisition Cost) = the marketing and sales costs to acquire a customer.
As a business owner, it is important for you to understand that CLV is not a single exact figure, but a model based on assumptions about customer behaviour and margins. Therefore, CLV should always be accompanied by a sensitivity analysis: what happens if retention decreases, or if acquisition costs rise? This way, you turn CLV into a reliable benchmark for decisions in your administration and strategy.
2. Data model in administration: from ledger to customer value
To reliably calculate Customer Lifetime Value (CLV), the administration must provide the correct data. For many entrepreneurs in retail, this means looking beyond just sales figures. CLV requires a data model in which both revenues and costs are visible at the customer or segment level. Only then will you get a realistic picture of the actual value of your customer base.
The basis lies with the general ledger. Every revenue entry must be linked to a customer or customer group. But just as important are the costs that are often spread throughout the administration. Think of:
Revenue and margin: sales orders and invoices, less direct purchasing costs.
Returns and discounts: booking on separate accounts and linking to customer or product segment.
Payment costs: transaction fees from PSPs (Payment Service Providers) such as Mollie, Adyen or PayPal.
Fulfilment and logistics: pick & pack, transport and inventory costs.
Customer service: time registrations or ticket costs that you assign to customers or segments.
Marketing and acquisition (CAC): advertising costs, discounts or campaigns aimed at customer acquisition.
In modern administration systems, such as Odoo or other ERPs, you can solve this with cost carriers or analytical accounts. This way, you not only link revenue but also cost flows to specific customers or segments. Thus, CLV becomes not just a standalone marketing calculation, but a part of your monthly reports.
The result: an overview in which you can see how much revenue and margin each customer or segment brings, what costs are incurred, and what their net value is over time. This makes CLV a tool that allows you to better manage profitability, rather than just focusing on revenue growth.
" Start with a simple CLV calculation and refine it as your administration provides more data. "
3. Calculation methods: from simple to advanced
Not every business has the same data maturity. Therefore, there are different ways to calculate CLV: from simple rules of thumb to advanced statistical models. The method you choose depends on the amount of data you have and how precisely you want to use the outcome in your financial management.
1. Simple heuristics (steady-state CLV)
This is the most commonly used approach among smaller retailers and webshops. You take the average margin per customer per period (for example, per month), multiply this by the retention probability, and adjust for the discount rate. Subtract the acquisition costs, and you have a first indication of customer value. This method is quick and insightful, but only provides an approximation.
2. Cohort and retention curves
Larger webshops often use cohort analyses: customers who joined in the same month or campaign are tracked in their purchasing behaviour. This way, you can see how long a group remains active on average and how much they spend. This method aligns better with the reality of e-commerce and makes differences visible between channels or customer segments.
3. Probabilistic models (BG/NBD, Pareto/NBD)
For companies with large amounts of data and recurring purchasing behaviour, there are mathematical models that predict the likelihood of a customer making a repeat purchase. Well-known methods include the BG/NBD and Pareto/NBD models, developed by Fader and Hardie. These calculations are more complex but provide a much more accurate prediction of CLV, especially in non-contractual settings such as retail and dropshipping.
Choice in practice
As a controller, I often advise starting with a simple method and gradually refining it. The most important thing is not the perfection of the model, but that you structurally incorporate CLV into your administration and reports. As you gather more data, you can transition to more advanced methods for better forecasts.
4. CLV vs. Customer Profitability Analysis (CPA)
In financial practice, it is important to distinguish between Customer Lifetime Value (CLV) and Customer Profitability Analysis (CPA). Both concepts have overlaps, but they view customer value from different perspectives and complement each other excellently.
Customer Lifetime Value (CLV) is a forward-looking metric. It refers to the expected net revenue that a customer will generate in the future, adjusted for the time value of money and after deducting acquisition costs. With CLV, you can calculate how valuable a customer can be if they remain active. This makes CLV particularly suitable for making decisions about marketing budgets, loyalty programmes, or investments in customer service.
Customer Profitability Analysis (CPA), on the other hand, is retrospective. Here, you analyse what a customer or segment has actually delivered in the past: revenue minus all assignable costs (cost-to-serve). Think of return rates, service costs, or discounts that are clearly visible in the accounts. CPA shows who your current profit-makers are and which customers are consistently generating losses.
For entrepreneurs in retail, the strength lies precisely in the combination. By using CPA, you gain insight into current profitability, while CLV helps you look ahead and underpin decisions for the longer term. Together, they form a complete picture that you can incorporate into your management reports: who is currently profitable, and who will remain valuable in the future?
In practice, I see that companies that use both CLV and CPA are better able to segment their customer portfolio, take targeted actions, and identify risks in a timely manner. As a result, customer value is no longer an abstract concept, but a concrete management tool in the administration.
5. Example calculation + sensitivity analysis
A CLV calculation doesn't have to start off complicated. It's about having a clear understanding of the basic parameters and knowing what happens when they change. Below is a simple example that you can directly translate to your administration.
Example
Average margin per customer per month: £12
Retention (p): 80% → 0.8
Discount rate (r): 10% → 0.1
Customer Acquisition Costs (CAC): €20
With the steady-state approach, we obtain:
CLV ≈ (12 × 0,8) / (1 + 0,1 – 0,8) – 20
= (9,6) / (0,3) – 20
= 32 – 20
= €12 net customer value
This means that an average new customer, after deducting acquisition costs and adjusted for the time value of money, contributes €12 to the profit.
Sensitivity analysis
Now the most important thing: what happens when the assumptions change?
Retention drops to 75%:
(12 × 0,75) / (1 + 0,1 – 0,75) – 20
= 9 / 0,35 – 20 = 25,7 – 20 = €5,7
→ The value of the customer nearly halves.
CAC rises to €30:
Output formula delivers€32 – 30 = €2
→ The recruitment channel is almost no longer profitable.
Marge rises to €15:
(15 × 0,8) / 0,3 – 20 = 40 – 20 = €20
→ A higher margin significantly increases the CLV directly.
Why this is relevant
With such an analysis, you can immediately see how sensitive your customer value is to retention, costs, or margins. This helps in decision-making: should you invest in customer retention, reduce costs, or monitor CAC more closely? For you as an entrepreneur, this is the way to test marketing and operational choices against financial reality.
6. Embedding in your administration and Odoo workflow
A calculated CLV only has value if you can also track it structurally in your accounts. Many entrepreneurs keep CLV in separate spreadsheets, but this disconnects you from your financial reality. It is precisely the link with your accounting that makes CLV a reliable steering instrument.
Connecting data streams
In Odoo and similar ERP systems, you can make use of analytical accounts or cost centres. This allows you to link not only revenue but also cost flows to customers or segments. Consider the following:
Sales orders → margin: invoices and purchase costs are directly linked to customer or product group.
Returns → cost pressure: return bookings and inventory depreciation become visible per segment.
Payment flows → transaction costs: PSP costs (e.g. Mollie, Adyen) are recorded on cost carriers.
Logistics/fulfilment → service costs: link pick & pack and transport costs via projects or analytical tags.
Marketing budget → CAC: advertising costs and campaigns are allocated to the channel from which the customer originates.
Customer service → support costs: hours or tickets are recorded and linked to customers via cost carriers.
Reports and dashboards
Through these connections, you can generate monthly cohort tables and dashboards in Odoo that display CLV by segment, channel, or product group. For example, you can see that customers acquired through Google Ads have a lower CLV than those acquired through organic channels, or that return rates are putting pressure on the profitability of a segment.
Practical advice
Make CLV part of your management reports: place it alongside revenue, margin, and cash flow. This way, you not only see what has been earned this month, but also how much value is in the pipeline for the future. This makes CLV a KPI that is truly embedded in your administration and supports strategic decisions.
7. Forecasting & planning
Once you have integrated CLV into your administration, it becomes a powerful tool for forecasting and planning. Instead of only looking back at revenue and margin, you can use CLV to look forward and make better financial decisions.
Budgeting and marketing expenses
With a calculated CLV, you know exactly how much you can invest in acquiring new customers. If the average CLV is €150 and the customer acquisition costs (CAC) are €40, then you know there is enough room to responsibly scale up the marketing budget. This helps you to justify budgets with hard figures, rather than relying on assumptions or industry averages.
Inventory and cash flow
CLV can also provide input for inventory and cash flow planning. If your cohort analyses show that customers typically make a repeat purchase after three months, you can align your purchasing accordingly. This prevents you from tying up too much capital in inventory or missing out on repeat purchases. By linking CLV to cash flow models, you can also better predict when revenues will come in and what costs will be associated with them.
Scenarios and forecasts
With CLV, you can calculate various scenarios: what happens if your retention increases by 5%, or if your return rate decreases? This provides immediate insight into the financial impact of operational decisions. In more advanced models, you can apply machine learning or statistical techniques to predict buying behaviour more accurately. For many SMEs in retail, this is not necessary; a well-structured cohort model with regular updates often provides sufficient reliability.
Strategic advantage
Using CLV in your forecasts transforms your planning from merely a numerical exercise into a strategic compass. You no longer focus solely on revenue, but on the actual and future value of your customer base. This gives you a significant advantage in a competitive retail market.
8. Governance, data quality & compliance
A CLV calculation is only as good as the data it is based on. As a retailer, you can only draw reliable conclusions when the underlying administration is accurate and the governance is well established. Without good data quality, CLV shifts from a steering tool to a source of poor decisions.
Data quality
First, check the basics: are revenue, discounts, returns, and costs consistently recorded in the same way? An incorrect coding or failing to link transaction costs to the correct cost bearer can significantly distort CLV. Therefore, set up controls: have a report generated monthly that compares the key general ledger accounts and analytical accounts with the calculated CLVs per cohort or segment.
Internal control governance
Ensure that there are clear agreements on who is responsible for the input of CLV data (for example, the administrator or controller) and who interprets the outcomes (management or advisor). Document the assumptions you use, such as retention rate, discount rate, and acquisition costs. This makes it possible to ensure consistency and to explain changes in the calculations later on.
Compliance and privacy
Since CLV uses customer data, you must take the GDPR into account. Personal data may only be processed if there is a legal basis for it. In practice, this means that you are often better off working with anonymised or aggregated data per segment rather than at an individual customer level. This limits risks and still provides reliable management information.
Practical advice
Make CLV part of your regular administrative controls. View it as a KPI that should be validated periodically just like your cash flow or margin reporting. This way, CLV remains a reliable metric that helps steer your business, without falling into the trap of spurious accuracy or compliance issues.
9. NL-context & business case
The Dutch retail sector is under pressure. Online sales continue to grow, but margins are razor-thin and return rates remain high. According to recent figures from the CBS, online revenue in the retail sector increased by 5.6% in the second quarter of 2025 compared to a year earlier. Pure online players even saw a growth of nearly 10%. That sounds positive, but behind this growth lies a harsh reality: more transactions also mean higher logistics costs, increased return flows, and greater pressure on customer service.
In this context, it is important for you as a business owner to look beyond revenue figures. CLV helps to determine which customers or channels are truly valuable. A customer who buys frequently but consistently returns items can ultimately be unprofitable. Conversely, a customer who purchases less often but always keeps products and requires little service can prove to be much more profitable.
For dropshippers and e-commerce businesses with low margins, CLV can even make the difference between profit and loss. By linking CLV to marketing channels, you can see which campaigns are profitable. Perhaps Google Ads generates many orders, but it turns out the CLV of these customers is too low to recoup the high acquisition costs. With that knowledge, you can reallocate budgets to channels that attract customers with a higher lifetime value.
The business case is clear: by incorporating CLV into your administration, you not only gain control over your current profitability but also build a sustainable and resilient business model. In an increasingly competitive market, this is not a luxury, but a necessity.
10. Common mistakes (checklist)
Calculating and applying Customer Lifetime Value (CLV) seems straightforward on paper, but in practice, it often goes wrong. Below is a checklist of common mistakes that I frequently see in retail, and how you can avoid them:
1. Overestimating retention
Many entrepreneurs make overly optimistic assumptions about customer retention. A small drop in retention (for example, from 80% to 75%) can halve the CLV. Therefore, regularly check whether your retention figures match reality.
2. Underestimating acquisition costs
Advertising costs, discounts, and free shipping are not always fully accounted for in the CAC. As a result, CLV appears higher than it actually is. Ensure that all cost items are correctly allocated in the accounts.
3. Returns and service charges forgotten
A customer who frequently makes purchases but consistently returns items or requests a lot of customer service can still be unprofitable. Always include return rates and service hours in the cost accounting.
4. Use one average for all customers
Not every customer segment is equally valuable. By calculating CLV only as an average figure, you miss crucial differences between, for example, organic customers and customers from paid campaigns. Therefore, work with segmentation or cohorts.
5. CLV the view of cash flow
A high CLV says little if the costs to realise that value are incurred too early, while the revenues come later. Always link CLV to your cash flow forecast to avoid surprises.
6. Blind trust in the figure
CLV is a model and based on assumptions. Without sensitivity analysis, there is a risk that decisions rely too heavily on a single figure. Always consider multiple scenarios.
By avoiding these pitfalls, you turn CLV into a reliable and practical management tool in your administration, rather than a theoretical calculation example.
11. Action plan (5 steps) + template offer
Calculating and applying Customer Lifetime Value (CLV) may seem complex, but with a structured approach, you can integrate it step by step into your administration. Below you will find a concrete action plan that you can use immediately.
Step 1. Define your data fields
Determine which data you need: revenue, margin, return percentages, transaction costs, fulfilment costs, customer service hours, and customer acquisition costs (CAC). Specify how and where these are recorded in the accounts.
Step 2. Link ledger and cost carriers
Use analytical accounts or cost drivers to make not only revenue but also costs per customer or segment visible. This is the basis for a reliable CLV calculation.
Step 3. Build cohort and segment reports
Analyse customers by month of acquisition or channel. This way, you can see how long customers typically remain active and which groups consistently provide more value.
Step 4. Calculate CLV and perform sensitivity analyses
Start simply with a steady-state formula. Then add scenarios to illustrate the impact of changes in retention, margin, or CAC.
Step 5. Integrate CLV into management reports
Make CLV a fixed KPI alongside revenue, margin, and cash flow. Discuss the results monthly and incorporate CLV into decisions regarding marketing budget, inventory, pricing, and service.
Template-offer
For entrepreneurs who want to get started practically, there are CLV templates available in which you can easily fill in your figures. This way, you can immediately see which customers or segments add the most value and where adjustments are needed.
By following this action plan, you make CLV a permanent part of your business administration and use it as a steering tool for sustainable growth.
12. Conclusion
Customer Lifetime Value (CLV) is not a marketing term, but a financial metric that every retailer should be aware of. It shows which customers or segments are structurally profitable and which are actually costing money. By incorporating CLV alongside revenue and margin in your accounts, you transform individual transactions into a comprehensive view of the true value of your customer base.
We have seen that CLV consists of four pillars: margin per customer, retention, discount rate, and acquisition costs. By properly recording these building blocks in your administration and linking them to the general ledger, you can reliably calculate CLV. Whether you work with simple formulas or advanced models, the key is to consistently incorporate CLV into your reports and decision-making.
For you as a business owner, this concretely means that you can budget more intelligently, assess marketing returns better, and make strategic choices based on customer value rather than just revenue. Especially in the current retail market, where online sales continue to grow but margins are under pressure, this is not a luxury but a necessity.
CLV gives you the opportunity to not only look at today but also at the future. It clarifies where you need to invest, where you need to save, and which customers form the foundation for sustainable profit. Those who take CLV seriously and integrate it into the business administration are building a company that not only grows in revenue but also in real value.