What is customer lifetime value (CLTV), and how does a Customer Success team track it? Let’s start with a basic definition and some examples.
Customer lifetime and its value
There are two main components to the definition of customer lifetime: the average length of time a customer stays with your business (customer lifetime), and the value (AKA revenue) that customer brings into your business in that timeframe (customer lifetime value). Let’s start with calculating a customer’s lifetime, based on factors like churn and renewals.
Customer lifetime formula and examples
Here is the simple formula for calculating your customer’s average lifetime: Customer Lifetime = 1 divided by 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
Customer Lifetime example with a dynamic churn rate
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. The lesson is that churn rates are dynamic, especially for those with new products.
Here’s a simplified example:
New product release 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, the churn rate will steadily trend down to 2.5%.
Now let’s build on this by calculating a customer’s lifetime value (CLTV).
What is Customer Lifetime Value (CLTV)?
Customer Lifetime Value (CLTV), also known as Lifetime Value (LTV), is the gross profit a customer delivers to your business in their lifetime. In other words, it’s the amount of revenue your business will make from a customer’s average time with your business.
CLTV is also an integral metric when calculating Customer Acquisition Cost (the cost of acquiring a new customer).
Customer Lifetime Value (CLTV) formula and examples
To calculate CLTV, you need to know average revenue per unit/user, gross margin, and average customer lifetime length (of which we reviewed and calculated above).
CLTV = [Average Revenue Per User or Unit (ARPU) X Gross Margin] X Customer Lifetime
Example 1: Shorter Customer Lifetime
Your average customer pays your business $50 per month (ARPU).
- It costs your business $10 to deliver your product to the customer – also known as the Cost of Goods Sold (COGS)
- Your average customer lifetime is 18 months
- Your business CLTV is $720
Equation: ($50 APRU – $10 service cost) X 18 customer lifetime
Example 2: Extended Customer Lifetime
Your average customer pays your business $25,000 per year (ARPU).
- It costs your business $10,000 to deliver your product to the customer
- Your average customer lifetime is 4.5 years
- Your business CLTV is $67,500
Equation: ($25,000 APRU – $10,000 service cost) X 4.5 customer lifetime
Customer lifetime value and customer acquisition cost ratio (CLTV : CAC)
The CLTV metric is integrated with tracking Customer Acquisition Cost (CAC).
A Customer Lifetime Value : Customer Acquisition Cost (CLTV : CAC) ratio is a critical SaaS and subscription business metric. This ratio tells you how profitable a customer will be over their lifetime. It helps answer a big revenue question for any business: will our new customers cost more to acquire than they contribute?
Learn more about CLTV : CAC ratio calculations and tracking on our Customer Acquisition Cost page.
Why customer lifetime value matters
Customer Lifetime Value is a strong indicator of customer loyalty. CLTV helps Customer Success teams gauge customer satisfaction, retention and churn rates, and keeps a pulse for the business moving forward. The longer your team tracks CLTV (and the larger the number), the better equipped you’ll be alongside sales and marketing to lower customer acquisition costs (CAC).
According to a oft-cited Harvard Business review study, an increase in customer retention rates by only 5% has been found to increase profits anywhere from 25% to 95%.
How to improve your customer lifetime value
Customer Success is pivotal in the customer’s journey, from solving pain points and delivering value to reducing churn via customer loyalty. CLTV is the metric to hold high when your CS team is assessing goals, budget, and performance.
Here are two examples where CLTV can support Customer Success teams in driving revenue and customer loyalty.
Own renewals and expansion
A sure path to more revenue and a better CLTV is making renewals, upsells and cross-selling easy for your customers. This means providing support, variety, and personalization along your customer’s journey. The recent 2022 Customer Success Leadership Survey indicates a decline in renewals and expansion ownership for the CS team. Only 41.8% own expansion, while just 50.2% own renewals. Larger companies tend to distribute responsibility across sales, account management, or a dedicated renewals team. These findings indicate a need for Customer Success to stay focused on both driving revenue and increasing customer satisfaction. An integrated approach will better serve customers and increase CLTV over time.
Balancing customer retention and acquisition
As mentioned in our definitions above and the importance of tracking a CLTV : CAC ratio, balance is key for customer retention and acquisition in any business strategy. Are you able to increase your Customer Lifetime without sacrificing steady growth? And conversely, is your CS team aligned with sales and marketing on the Ideal Customer Profile (ICP) so growth doesn’t lead to an increased churn rate?
Additional resources on customer lifetime value
- SaaS retention benchmarks: How does your company compare? ChurnZero webinar featuring Rob Belcher, managing director at SaaS Capital
- HubSpot’s interactive CAC calculator and benchmarks
- 20 quick insights on Customer Success and SaaS metrics with Dave Kellogg, Dave Kellogg Consulting
- Key SaaS and Customer Success metrics you should care about with You Mon Tsang, CEO and co-founder, ChurnZero and Dave Kellogg, Dave Kellogg Consulting
- 2022 Customer Success Leadership Study, authoritative picture of the trends, priorities, challenges, and best practices shaping Customer Success