Customer Lifetime Value

Customer lifetime value (CLV) describes how much an average customer is worth over the entire business relationship. It tells you how much you can spend to acquire a customer without losing money.

Formula

A simple formula for subscription and repeat-purchase models:

CLV = average monthly revenue × margin × average customer lifetime in months

For subscriptions, you can estimate customer lifetime from the churn rate:

Average customer lifetime = 1 ÷ monthly churn rate

Example

A software product costs $99 per month, the margin is 80%, and 4% of customers cancel each month.

• Customer lifetime: 1 ÷ 0.04 = 25 months
• CLV = $99 × 0.8 × 25 = $1,980

If customer acquisition cost is $500, every new customer brings in almost four times what it cost to acquire.

CLV in performance marketing

The first purchase often reflects only a fraction of a customer's value. If you judge campaigns only by first-purchase ROAS, you may switch off exactly the ads that bring in your most loyal customers. With CLV in mind, you can accept a higher cost per deal when those customers are worth more in the long run.

To do that, you need to attribute recurring payments to the original lead and its campaign. LeadMetrics connects payments and subscription events from Stripe, CopeCart or Digistore24 with the lead and the campaign it came from. That way you see not just the first revenue, but also follow-up payments by channel and campaign.

CLV and lead value

In lead generation, CLV is closely tied to lead value: lead value is a customer's CLV multiplied by the probability that a lead becomes a customer.

Common mistakes

• Revenue instead of contribution margin: A revenue-based CLV overstates how much you can afford to spend on acquisition.
• Averaging across all channels: Customers from different campaigns often have very different lifetime values.
• Overly optimistic assumptions: For new products, it is safer to assume a shorter customer lifetime.