Customer Lifetime Value (CLV)
The total profit expected from a customer over the whole relationship.
Formula
Variables
Example
ARPU $50, margin 0.8, churn 0.05: CLV = $800
How it works
Customer Lifetime Value estimates how much gross profit an average customer is expected to generate before they stop buying. It works by taking the profit earned from a customer in a typical month and spreading that over the average number of months the customer stays active; since average lifetime is roughly 1 divided by monthly churn, dividing by churn gives the expected duration. Using gross margin instead of revenue matters because only the portion left after direct costs is truly profit.
When to use it
Use this formula when comparing how valuable different customer groups are, especially in subscription businesses, SaaS, e-commerce memberships, or any model with repeat purchases and measurable churn. It is also useful for deciding how much you can afford to spend on acquiring a customer while still staying profitable.
Worked example, step by step
ARPU = $40 per month Gross margin = 70% = 0.70 Monthly churn rate = 4% = 0.04 Step 1: Find monthly gross profit per customer $40 × 0.70 = $28 Step 2: Estimate the average lifetime in months 1 ÷ 0.04 = 25 months Step 3: Multiply monthly gross profit by lifetime $28 × 25 = $700 CLV = $700
Common mistakes to avoid
- Using revenue instead of gross profit by forgetting to multiply by gross margin
- Entering churn as 4 instead of 0.04, which makes the result far too small
- Mixing monthly churn with yearly ARPU or another time period without converting units consistently
Did You Know?
Small cuts in churn have an outsized effect on CLV because churn sits in the denominator.
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