Commerce Glossary
A comprehensive resource to help you master the language of commerce.
What is Customer Lifetime Value (CLTV or CLV)?
How Does Customer Lifetime Value Work?
The simplest way to calculate this metric is by multiplying your expected customer lifetime by your average revenue per account (ARPA), then subtracting customer acquisition cost. However, depending on your business model, that formula may leave out important variables, such as expansion revenue over a customer’s lifetime, widely differing ARPAs, or your gross margin. Thus, a more complex calculation is necessary in order to estimate CLTV accurately – and other metrics that derive from it. VC experts David Skok and Stan Reiss have proposed the following formula for an all-encompassing view of CLTV:
CLTV = a / c + [m(1 – c)] / c2
Where the variables represent:
a = initial ARPA per month x Gross Margin %
m = monthly growth in ARPA per account x Gross Margin % (note this is a $ figure, not a percentage) c = Customer Churn Rate % (percentage of revenue not renewed at the end of a subscription term).
CLTV is an important reference metric for other KPIS you may want to track for your SaaS business. For example, you should analyze customer acquisition cost (CAC) together with the CLTV to get an accurate projection of the viability of your business model.
The return on CAC is another metric that involves CLTV, and it is calculated as CLTV divided by CAC. The customer lifetime value to customer acquisition cost ratio (sometimes also called rCAC) will help you determine the efficiency and effectiveness of your sales and marketing spending.