What is Customer Lifetime Value?
Customer Lifetime Value is a prediction of the total value that a customer will bring to a business over the course of their relationship with the company. Customer Lifetime Value is frequently abbreviated CLTV or LTV.
To calculate Customer Lifetime Value, you need to know:
- the expected duration of the customer’s subscription (in months or years)
- the average revenue that the customer is expected to generate per month or year
- The profitability or margin of the customer
The formula for Lifetime Value is:
As an example, if a software company earns $10,000 gross margin from a customer per year and retains a customer for 5 years on average, their lifetime value will be $50,000.
How is Customer Lifetime Value is used by SaaS companies?
Lifetime Value is an important metric because it helps businesses understand the value of their customers and make informed decisions about how much they can afford to spend to acquire new ones. By comparing lifetime value to acquisition (CAC), businesses can determine the return on investment of their customer acquisition efforts and make informed decisions about how to allocate their resources.
LTV Visualization Example
This chart is an example of customer lifetime value, with month on month and budget comparisons, making it much easier to understand trends, improvements, even seasonality.
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Cost to acquire one new customer
LTV : CAC
Lifetime value divided by acquisition costs, indicating the margin delivered by each new customer
CAC Payback Period
Measures how long it takes for a company to recoup the costs of acquiring a new customer.
SAAS METRICS LIBRARY
Read about more SaaS metrics, from ARR to Rule of 40.