Customer Lifetime Value
Lifetime value estimates the gross profit a customer generates over their lifetime, using margin and churn.
Formula
Variables
Example
ARPU $30, margin 0.8, churn 0.05: CLV = 30×0.8/0.05 = $480
How it works
Customer Lifetime Value estimates the gross profit a typical customer will contribute before they stop buying, based on how much revenue they bring in each period, how much of that revenue remains after direct costs, and how long they are expected to stay active. The formula works because a customer who generates ARPU each period and has a constant chance of churning effectively contributes an expected number of periods of business equal to 1/c. Multiplying that expected lifespan by the gross profit earned per period (ARPU × margin) gives the total expected gross profit from one customer.
When to use it
Use this when comparing acquisition costs, budgeting for marketing, or deciding how much to spend to win and retain customers. It is especially useful in subscription businesses, SaaS, and other recurring-revenue models where churn and margin are measurable.
Worked example, step by step
Suppose a subscription app has ARPU = $45 per month, gross margin m = 0.70, and monthly churn c = 0.03. Step 1: Gross profit per customer per month = ARPU × m = 45 × 0.70 = $31.50 Step 2: Expected customer lifespan in months = 1 / c = 1 / 0.03 = 33.33 months Step 3: CLV = gross profit per month × expected lifespan = 31.50 × 33.33 ≈ $1,050 Final answer: CLV ≈ $1,050 per customer
Common mistakes to avoid
- Using total revenue instead of gross profit by forgetting to multiply by margin
- Putting churn in as a percentage like 3 instead of a fraction like 0.03
- Confusing CLV with revenue lifetime value, which ignores direct costs
Did You Know?
A healthy business keeps its LTV-to-acquisition-cost ratio above 3:1 — each customer earns back far more than they cost to win.
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