Example: How to Calculate Lifetime Customer Value
You are a online book retailer, like Amazon.com. A customer buys ten books from you over the life of your relationship. The average sale price of a book is $15, and the average cost of a book (the price that you have to pay to get the book from the distributor) is $10. Then the contribution to profit of each book is $15-$10=$5. As you sell 10 books over the lifetime of your relationship with the customer, their lifetime customer value to you is $5/book * 10 books = $50.
Lifetime customer value is an important concept in marketing, because lifetime customer value needs to be greater than the customer acquisition cost for a customer to be profitable. In the example above, if you had spent $60 in marketing costs to get that customer, you would lose money on that customer over the life of your relationship.