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Customer Lifetime Value (CLV) is the predicted amount a customer will spend on your product or service throughout the entire relationship (or before they churn). This metric helps shift the focus from short-term transactional thinking to the long-term value of repeat business.
You can use this formula to calculate the CLV for a customer:
CLV = ARPU x Customer Lifetime
The higher your user churn, the lower your lifetime value will be. Therefore, you can also use the churn rate (which you’d be more likely to have) to calculate your CLV.
CLV = ARPU/churn rate
It’s important to understand the CLV because it can help you make better decisions on how you acquire new customers. If your customer acquisition cost (CAC) is too high and that same customer has a low LTV, you probably need to find better-fit customers.
The higher your LTV and the lower your CAC, the faster your business can grow. A good rule of thumb is that if LTV/CAC isn’t above 3, you’re spending too much on acquisition.
