What is customer lifetime value?

Customer lifetime value (CLV) is the estimated total revenue a business can expect from a single customer throughout the entire relationship. Also known as LTV, this metric helps you understand how well your product meets customer needs, where you're excelling, and where there’s room to improve. CLV is especially important for evaluating your return on acquisition costs and gaining a clearer picture of your long-term business health.

How do you calculate customer lifetime value?

You calculate customer lifetime value by multiplying your average revenue per user (ARPU) by gross margin and dividing that number by your churn rate. Customer Lifetime Value (LTV) = (Average Revenue Per User * Gross Margin) / Churn Rate

What’s the difference between CLV and LTV?

There’s no material difference between the terms “CLV” and “LTV” (or even CLTV). These acronyms all refer to customer lifetime value which is a useful financial ratio that can be used to analyze a company, and are often used interchangeably. For many companies, usage of each term often comes down to an agreed-upon preference (ours is LTV). However, some companies will distinguish between CLV and LTV in terms of granularity. In those cases, LTV refers to the average customer lifetime value across the entire customer base, whereas CLV refers to lifetime value for an individual account.

Why does customer lifetime value matter?

Customer lifetime value is an extremely important metric in SaaS because it tells you the total revenue you can expect a customer to generate over the course of your relationship together. Calculating customer lifetime value can give executives insight into the long-term viability of the business model. Understanding the value of customer relationships helps CS and support justify the costs of new initiatives. Seeing LTV according to customer segments can help marketing refine strategies. Visibility into LTV helps forecast and plan more accurately for the future.

Why tracking LTV used to be so difficult?

Tracking LTV isn’t easy. Measuring customer sentiment takes a lot of data, such as purchase history, upsells, downgrades, and renewal rates. Data is often scattered across systems and hard to analyze. It takes serious time and effort to pull, clean, and analyze that data. Most teams relied on spreadsheets and manual calculations with inconsistent results.

How to calculate lifetime value (without taking years off your life)?

FP&A platforms can help connect your CRM and automatically calculate your customer LTV. They group customers by cohort and product line, allowing you to track the effectiveness of sales and marketing efforts and identify valuable customer journeys and milestones in real time.

What is the formula to calculate customer lifetime value?

The CLV formula is (Average Revenue Per User * Gross Margin) / Churn Rate. This means that the customer lifetime value calculation favors a higher ARPU and gross margin, as well as a lower churn rate. The best customers that can ultimately lead you to negative churn are high-value customers with a longer than average customer lifespan.

How do you increase customer lifetime value?

The best way to improve LTV is to generate more brand loyalty and create loyal customers. This can include anything from improving your customer retention through a strong presence on social media about upcoming features to improving the client experience based on customer feedback, ensuring your customers’ basic needs are met, and going the extra mile to add value for them. You can also raise prices to increase average CLV, although this is a less sustainable way to increase lifetime value.

What qualifies as a high CLV value?

A high customer lifetime value is three times your customer acquisition cost. If your LTV/CAC ratio is lower than that, it can mean your business is losing money in customer acquisition, while a ratio of more than 3:1 can indicate that you’re not putting enough money into growth opportunities.

Finance Archives | Page 2 of 2

Customer lifetime value

Customer lifetime value (CLV) is the estimated total revenue a business can expect from a single customer throughout the entire relationship.