What is the Customer Lifetime Value to Your Business?

Your vision is to know exactly what to expect in terms of how long customers stay with you and the revenue you can expect from customers who purchase from you or the lifetime value.

The dilemma is you may or may not know what it costs to acquire a customer (CAC) at this point, but let’s say you do, and your next step is to determine how long a customer tends to stay and what is that value? Where do you start? This article will walk through an example business, finding churn rate, lifespan, revenue per customer, and lifetime value.

The case is a subscription service that has been in business for 3 years.

Let's say you’ve read through the customer acquisition cost article on this site already, and to keep it simple, I am going to say, I am confident your cost to acquire each paying customer is $50, and your subscription model is billed monthly at $10, no contracts. But how long will each customer stay? A year, two, five? So do you make $120 per customer on average or $600 over their lifetime with you? Or maybe not even, what if they stay for 3 months, at $30? This figure will provide you a baseline if you’ve never looked at this to figure out if your investments in new customers make sense and whether you need to look at the spend or user experience. Maybe your product doesn’t offer enough value after a set time, maybe customers outgrow your service, maybe it takes that long to find out they want to try another, or maybe there are roadblocks in the customer journey. Or, maybe you have a business that yields extremely high returns, and you keep customers for life! Let’s hope the customer lifetime value is not $30. Ideally, if you look at customer lifetime value/customer acquisition cost, that would be higher than 3, but let’s find out.

The solution is to take the next step and look at the customer lifetime value (CLV) calculations.

I’ve done quite a bit of research in this area, and full disclosure, there isn’t a one size fits all for this type of calculation, and for most businesses, there are some assumptions. This article is an attempt to simplify the calculations. I’ve found one of the easiest to understand due to layout, yet more complicated examples to be Starbucks, listed in references that Neil Patel walks through. Like other businesses I found in research, Starbucks actually looks at an average between three different calculations. I hope this article provides guidance for small businesses and ideas for the various ways you can consider looking at customer lifetime value.

Step One: Find Your Churn Rate

To get started, you need to know how long a customer typically remains a customer. For some, you may know this because you have years of data; however, for many, you will need to estimate this. To estimate this, you can start here.

You may look at customers you had at the beginning of the month, 1,000, and the customers lost, 100.

Churn = 100 customers lost / 1000 customers at the beginning of the month = 10% churn.

Step 2: Find Your Customer Lifespan

Lifespan = 1 / (1 - retention rate), so let’s say you have a churn of 10% and retention of 90% (these have to total 100%). Your predicted customer lifespan is 1 / (1 - .9) = 10 years. You may question the 10 years because you’ve only been in business for 3 years?! You have a meager churn rate based on current data, so, therefore, your predicted value is on the higher end. Remember, this is the best we can do to find this figure because the case is a relatively new business, and unlike Starbucks, we don’t have 20 years of data.

Step 3: Find Your Average Revenue per Customer

We stated that, on average, you make $10 per month per customer. If you don’t have straightforward pricing, you could find this by looking at the total revenue for the year or month / total customers in that period. Make sure you pay attention to months vs. years and keep it consistent when calculating in any of these steps.

Step 4: Lifetime Value

Lifetime Value = Avg monthly recurring revenue per customer X Customer Lifespan

Lifetime Value = $10 X 120 months in 10 years = $1200

As mentioned at the very beginning of this article, you want to check this against your spend on acquiring customers so you, on average, make $1200 over the lifetime and spend $50, which is a ratio of 24. That’s amazing! Of course, these numbers were used to be simple. If you end up in the less than 3 range with that ratio, I would recommend checking out articles on the customer journey and brand connection to improve your churn rate and keep customers longer. Your other option would be to look more into what you spend to acquire customers and determine if those channels are returning what they should be.

Give this a try and comment to let me know how it went!

Learn more about how I can help.

Written by Nicole Hullihen, July 4th, 2021

References recommended if you are interested in learning more on customer lifetime value:

Baremetrics. (n.d.). How to Calculate Customer Lifetime Value (Improve LTV). Baremetrics. Retrieved from https://baremetrics.com/academy/saas-calculating-ltv.

CLV Calculator. (n.d.) Customer Lifetime Value. The Complete Guide to CLV. Retrieved from https://www.clv-calculator.com/customer-retention/converting-retention-rate/.

Fontanella, C. (2021, May 6). How to Calculate Customer Lifetime Value. Hubspot. Retrieved from https://blog.hubspot.com/service/how-to-calculate-customer-lifetime-value.

Patel, N. (n.d.) How to Calculate Lifetime Value- The Infographic. NeilPatel. Retrieved from https://neilpatel.com/blog/how-to-calculate-lifetime-value/.

Qualtrics XM. (n.d). What is Customer Lifetime Value (CLV), and How Do You Measure It? QualtricsXM. Retrieved from https://www.qualtrics.com/experience-management/customer/customer-lifetime-value/.