Customer lifetime value (CLTV / CLV)
Customer Lifetime Value (CLTV or CLV) is the total sum of all revenue a customer is expected to generate for a company over the course of their lifetime. CLTV is usually calculated by multiplying a customer's average value by how many years/months they expect that customer to remain a customer.
How is Customer lifetime value (CLTV / CLV) calculated?
The formula for calculating Customer lifetime value (CLTV / CLV) is:
CLTV = Average customer value X Average customer lifespan
As an example, for a monthly subscription service, if a customer starts paying $20 a month for a subscription and the average customer lifetime is 25 months then you get a customer lifetime value of $500 ($20 dollar value X 25 months).
Why is Customer lifetime value (CLTV / CLV) important to measure?
It allows companies to make more informed decisions about how much they can spend on marketing and how much they can invest in customer acquisition campaigns. It also helps them allocate resources more effectively between acquisition, retention, and expansion of their customer base.
CLTV is also used when determining the value of the acquisition: if a customer spends $500 on your product per year, but only stays with you for 1 year before leaving, their CLTV would be $500. If they stay with you for 10 years before leaving, their CLTV would be $5,000.
Frequently asked questions
Have another question? Reach out to our retention expert team.
- Are CLV and CLTV the same thing?
- Both CLV and CLTV refer to Customer Lifetime Value. CLV/CLTV represent the average revenue you can expect to generate from customers over the entire lifetime of their account.
- Is CLTV a KPI?
- In SaaS industries and other subscription based services CLTV is a very important KPI. Customer lifetime value allows you to understand how much revenue you expect to receive from a customer over the lifetime of their subscription, this allows you to forecast future revenue, allocate marketing budget to improve the CLTV and forecast business growth in terms of both revenue and profit.
- What's the difference between LTV and CLTV?
- LTV is the aggregation of all the revenue that you can expect to earn from your customers. CLTV is the measure of how much a single customer will bring into your business over their forecasted lifetime interacting with your business.
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