How to Measure the Value of Your Customer Relationship – CLV

How much can you spend to acquire and retain a customer?

Customer Lifetime Value (CLV) signifies the value of our customer relationship and how well our product is. It is the future profit we can expect to earn from a subscriber for the duration of their relationship with the business. Further, it represents the upper limit on how much you can spend on acquire new customers.

Why is it important?

CLV is heavily impacted by churn, as described earlier, and in the example below CLV is reduced from $100 to $62 because of an increase in churn from 5% to 8%. So retaining existing subscribers is hugely important.

How To Calculate CLV

There are four steps in calculating CLV, it’s not hard but it requires you to collect some data to get to the number. Here is how to calculate CLV i 4 steps:

How To Calculate Lifetime

Calculating Lifetime = 1 / monthly churn rate.

If your monthly churn rate is 10%, then average Lifetime of a customer is 1/0.10= 10 months

Calculating Average Revenue Per User (ARPU)

[ARPU] = [MRR (end of month)] / [# of Subscribers (end of month)]

Make sure you have “normalized” the subscription plans where the subscription period is longer than one month. 1 year plan should be divided into 12 months.

Calculating Gross Margin % (GM%)

Gross Margin is revenue minus the all cost related to developing and maintaining the product as shown below:

Support, maintenance and development cost are cost related to the product development, including product owners, testers and any external testing costs. Support does NOT include Customer Support by only IT support. Licensing includes workstations and software licensing for IT and any internal servers etc.

Calculating CLV

CLV = ARPU X [Gross Margin %] / [MRR churn rate]

So there you go.

There are plenty of great SaaS tools that integrate to almost any payment provider, like Stripe, PayPal etc. and provide you with insight to your Annual Recurring or Monthly Recurring Revenue and Churn.

I can recommend Baremetrics.

But … When it comes to metrics that rely on your cost, cost ratios and margins, the calculation and monitoring falls on you, or your CFO, to keep track based on your accounting data.

I have set this up on dashboards using Google Sheets or Power BI so all metrics are always visible for the team.