Customer Lifetime Value (CLV)
Customer lifetime value (CLV or LTV) is an estimate of the total revenue or gross profit a company expects to earn from a customer over the whole relationship.
Also called: CLV, LTV, lifetime value
Why it matters
Lifetime value tells a company how much a customer is worth, which sets how much it can sensibly spend to win one. It is often compared with customer acquisition cost: if winning a customer costs more than that customer is likely to bring in, growth loses money. CLV also helps compare segments and channels by the value of the customers they produce.
A simple version for subscription businesses multiplies average revenue per customer per period by the average number of periods a customer stays, which can be estimated from churn. Using gross margin instead of revenue gives a more conservative figure. Because it is a forecast, CLV is only as reliable as the retention and revenue assumptions behind it.
Example
A company's average customer pays $1,000 a month and the business keeps about 80 percent of that as gross margin. Monthly churn is 2 percent, which implies an average lifetime of about 50 months. Lifetime value on a gross margin basis is roughly $800 times 50, or $40,000 per customer.
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