Customer lifetime value (CLTV) requires a few different components for calculation:
- the total of revenue contributing customers
- the average MRR contribution of those customers
- the rate of churn for these customers
Using these elements, CLTV is calculated as follows:
Average MRR Per Customer / Churn Rate
So if the average MRR contribution is $10 per month, and monthly churn is 10%, CLTV is:
$10 / 0.10 = $100
How CLTV works
While the calculation of CLTV is a little complex, the logic is relatively simple. If an average paying customer provides $10 in revenue monthly, then CLTV is equal to the number of months we can expect multiplied by that $10. We figure out how long the customer is likely to stay from the subscriber churn rate.
Using your CLTV
CLTV is mostly commonly used with CAC (cost of acquisition) to optimize investments in generating new customer signups. If your CLTV is $60 and your CAC is $10, then you're in a very healthy place.
A good guide is to maintain a CLTV:CAC ratio of at least 3:1. If you fall below that number either your churn rate or acquisition investment need rapid adjustment.
Adjusting your CLTV
A useful operation for your CLTV is a confidence adjustment. This means that you adjust your CLTV using a multiplier based on your own knowledge about recent and upcoming market trends.
Occasionally, seasonal dynamics might mean your recent churn rate was unusually high. In such circumstances you may want to adjust your CLTV x 1.15 to correct the spike in churn.
Alternatively, you may know that a popular series is coming to an end in the next month. In such cases you may want to adjust your CLTV x 0.85 or even less to correct for the coming spike in churn.