Customer Lifetime Value LTV
What is it? How to calculate it?
What is LTV?
Customer Lifetime Value, usually referred as LTV (sometimes as CLTV or CLV) measures the profit your business makes from any given customer. The purpose of the customer lifetime value metric is to assess the financial value of each customer, or from a typical customer in case you’re measuring it generally.
Customer lifetime value helps you make important business decisions about sales, marketing, product development, and customer support, such as:
- How much should I spend to acquire a customer?
- Who are my best customers? How can I offer products and services tailored for them?
- How much should I spend to service and retain a customer?
- What types of customers should sales reps spend the most time on?
How to calculate LTV?
To measure lifetime value for a subscription business we need to use three variables:
To calculate it, take the revenue you earn from a customer, subtract out the money spent on serving them, and see for how long they stay bringing you this profit before churning.
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LTV = ARPA * % Gross Margin / % MRR Churn Rate
Improving your Customer Lifetime Value can have dramatic impacts throughout your business. So you should always be looking for higher ARPA (customers paying you more money), higher Gross Margin (costing less to produce) and lower Churn Rate (paying you for a longer time).
Customer Profitability
Some sources may refer this calculation as CP (Customers Profitability) instead of LTV, in a way that CP represents the difference between the revenues earned from and the costs associated with the customer relationship during a specified period; and LTV represents the present value of the future cash flows attributed to the customer relationship.
Although there’s no common agreement on that, in SaaS we tend to use LTV only.