What is Customer Lifetime Value and How to Calculate It
Customer Lifetime Value (CLTV), also known as, Lifetime Value (LTV), is the gross profit a customer delivers to your business in their lifetime. It is the amount of revenue your business will make from a customer over their average lifetime as a customer.
This metric helps determine which customers are your most profitable and can be useful both pre-sale to focus on acquiring highly valuable customers but then also post-sale to make sure your Customer Success team is able to focus their efforts on retaining your customers with the strongest lifetime value.
In other words, the longer a customer continues to purchase from a company the greater their lifetime value becomes. And the good news is this metric is something that Customer Success teams can directly influence during the customer’s journey as they play a critical role in solving customer pain points and delivering value and business outcomes to increase customer loyalty and ultimately reduce churn.
How Do You Calculate Customer Lifetime Value?
To calculate customer lifetime value, you need to know your average revenue per unit/user, your gross margin, and your average customer lifetime length.
Customer Lifetime Value Formula:
CLTV = [Average Revenue Per User/Unit (ARPU) x Gross Margin] x
Customer Lifetime Value Example:
- Your average customer pays your business $25,000 a per year (ARPU).
- It costs your business $10,000 to deliver your product to the customer.
- Your average customer lifetime is 4.5 years.
Therefore, your business CLTV is $67,500.
Here is the math to show how we got there:
($25,000 APRU – $10,000 service cost) x 4.5 customer lifetime = $67,500
Three Ways to Grow Customer Lifetime Value
- Create Expansion Opportunities – One way to generate more revenue from your customer base is to make sure there is a clear path for upsell and cross-sell opportunities for your existing customers. If you only offer one product at one standard level, it is going to be near impossible to allow your customers grow with you over the years.
- Streamline Customer Success Operations– If you are able to grow your customer base and not have to incrementally increase your Customer Success and Support team’s headcount but can scale effectively with more streamlined team structure, processes and systems that leaves a lot of the repetitive or heavy leg work to automation, you will be able to keep your margins in check.
- Increase Customer Retention– This one is a no-brainer but the longer you are able to increase your customer lifespan, the more revenue you will receive over time. That means your organization should be weary of overly focusing on customer acquisition at the cost of customer retention. This will require an organizational shift in some cases, to know up front Sales and Marketing should only go after your ideal customer profile (ICP) with the idea to sustain revenue and profit growth from your existing customer base.
To learn more about other SaaS terms and metrics you should be tracking today as a Customer Success professional check out our Churnopedia.
Customer Success Around the Web
- 3 Strategies for Best-In-Class CSM Onboarding– Learn three areas to consider in order to ensure your team onboarding is effective.
- How Customer Success Leaders Can Weather (Or Avoid) A Labor Crisis– Discover steps to take to ensure your CSMs are in it for the long haul and feel fulfilled and rewarded in their position.
- How to Create an Effective Customer Journey Map– Find out how to map out your customer’s journey using these examples and templates.
Fighting Churn is a newsletter of inspiration, ideas and news on customer success, churn, renewal and other stuff and is curated by ChurnZero