What is Customer Lifetime Value (CLV)?
Customer Lifetime Value (CLV or LTV) is a crucial metric that predicts the total net profit a business can expect from a single customer over their entire duration of their relationship. It's a forward-looking metric that directly illustrates the financial impact of customer churn. Understanding your CLV is fundamental to building a sustainable business model, as it highlights the long-term value of retaining customers versus the one-time cost of acquiring them.
The Link Between CLV and Churn
CLV and customer churn are inversely related. When your churn rate is high, your customer lifetime is short, which drastically reduces your CLV. Conversely, by focusing on strategies that reduce churn, you increase the average customer lifespan, thereby maximizing their lifetime value. This calculator demonstrates that relationship by incorporating the monthly churn rate directly into the CLV formula.
How to Use This Tool
- Average Revenue Per Month ($): Enter the average amount of revenue you earn from a customer each month.
- Gross Margin (%): Input your gross margin percentage. This is your revenue minus the cost of goods sold (COGS). For example, if your margin is 80%, enter 80.
- Monthly Churn Rate (%): Enter your customer churn rate for the month. If your churn rate is 5%, enter 5.
Benefits of Tracking CLV
- Smarter Spending: Knowing your CLV helps you define a reasonable Customer Acquisition Cost (CAC).
- Identify Best Customers: Segment customers by CLV to identify your most profitable user personas.
- Measure Impact of Retention: Quantify the financial benefit of your efforts to reduce customer churn.
- Improve Forecasting: Use CLV for more accurate long-term revenue projections.