Standard : Customer Lifetime Value (CLV)

Description

Customer Lifetime Value (CLV) measures the total revenue a business can expect from a customer account over its lifetime. It helps determine how much to invest in acquisition and retention.

CLV is essential for evaluating unit economics and long-term product profitability.

How to Use

What to Measure

• Average revenue per customer per period (ARPU).
• Average customer lifespan (e.g. months retained).

Formula

CLV = ARPU × Average Customer Lifespan

Example: £100 ARPU × 24 months → CLV = £2,400.

Instrumentation Tips

• Use historical churn data to calculate average lifespan.
• Calculate separately for different customer segments or tiers.
• Adjust for gross margin for a profit-focused CLV.

Why It Matters

• Investment guidance: Informs maximum spend on customer acquisition.
• Profitability insight: Shows true value of a customer over time.
• Prioritisation: Highlights which segments to focus on retaining.

Best Practices

• Recalculate regularly as product pricing or churn shifts.
• Compare CLV to CAC to ensure healthy payback ratio.
• Use gross margin CLV for more accurate profitability view.

Common Pitfalls

• Overestimating lifespan based on small data sets.
• Ignoring gross margin, leading to inflated CLV figures.
• Using revenue instead of net contribution.

Signals of Success

• CLV grows through higher retention or upsell success.
• CLV/CAC ratio stays above industry benchmarks (e.g. >3:1).
• Product strategy aligns to high-value customer segments.

Related Measures

• [[Customer Acquisition Cost (CAC)]]
• [[Net Revenue Retention (NRR)]]
• [[Churn Rate]]