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Understanding the Metrics: Customer Lifetime Value

Updated: Jan 23, 2021

Customer Lifetime Value (CLTV) Goal: Acquire, grow and retain healthy customers. Highlights:

  1. A few large customers are often preferable to many small customers.

  2. Larger customers take longer and cost more to acquire.

  3. Customers are most objectively measured by lifetime value.

CLTV

Customer lifetime value (CLTV) calculates the long term net value over the lifetime of each customer. CLTV excludes costs to acquire a customer (CAC).


CLTV = ARR * gross margin * expected continuous life (in years)

or

CLTV = ARR * gross margin * 1 / annual churn rate


Customers Rule 1. A few large customers are often preferable to many small customers.

A smaller pool of customers enables more specialized support and less variability between customer use cases.


Customers Nuance 1. Concentrated customer bases can be more volatile.

A single customer within a small pool has a more impact on the overall population.


Customers Rule 2. Larger ARR customers often require longer lead times & higher acquisition costs.

Significant spend typically triggers more rigorous approval processes & controls. May require alignment of timing with customer budget / capex requests.


Customers Rule 3. Retaining an existing customer generally adds more net value than acquiring a new customer, especially in the short term.

Cost to acquire a customer is incurred only for new (or returning/recovered) customers; sales commission rates are often much lower for renewals vs. first-time agreements. Accounts retained also disproportionately impact metrics such as gross revenue retention, net revenue retention, and customer lifetime value.


Customers Rule 4. High retention rates and high margins drive high customer lifetime value.

Customer lifetime value = customer ARR (with growth factor if likely or guaranteed) * operating margin * estimated average lifetime per customer



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