Customer lifetime is how long a customer stays with your company in a specific time period, typically months or years. You need a substantial number of customers to accurately calculate your average customer lifetime. If you have too few clients, each client’s churn or renewal will have an outsized impact on your calculation. But with a suitable sample size, here’s an easy way to calculate your customer lifetime:
|Customer Lifetime =||1|
|Customer Churn Rate|
Note: Your customer lifetime and churn rate need to match in timeframe (months or years).
- If you have a 2.5% monthly churn, here’s your calculation:
- 1 ÷ 0.025 (monthly churn) = 40, which is the average number of months customers stay with your company
- If you have a 25% yearly churn rate, here’s your calculation:
- 1 ÷ 0.25 (monthly churn) = 4, which is the average number of years customers stay with your company
Caveat: A good sample set of customers is needed to make this formula accurate. For example, let’s say a customer buys a newly launched product with a month-to-month contract. Calculating an accurate customer lifetime for such a young product is a challenge as newer customers often churn faster than more mature customers.
Here’s a simplified example: The product is released in January.
- Each month, the business acquires 100 new customers.
- The churn rate for the first month after customer acquisition is 30%.
- The churn rate for the second month after the customer acquisition is 15%, and so on.
As shown in the table above, as the year unfolds, the churn rate of the base starts at 30% (in February when all customers are new) and steadily drops to 9.2% in the following January. In fact, if you extend this table over many years, you’ll see that the churn rate steadily trends to 2.5%.
The lesson is that churn rates are dynamic, especially for those with new products.