What is CLV?

What is CLV?

CLV is short for Customer Lifetime Value; an estimate of the projected total value of a customer to your business. To be as accurate as possible, we use a proprietary algorithm to derive the present value of a customer using actual historic values and predictive modeling. This is far more accurate than most calculations that merely account for averages against churn.

Here’s how we calculate it: CLV = ARPU (Historical + Predictive) / Churn

Why is this so important? 

Understanding CLV will help you determine how much you can spend to acquire a customer, how much support you can/should offer that customer, and ultimately how sustainable your business model is over time.

Here are two examples:

Your SaaS business has an ARPU (Average Revenue Per User) of $125, and churn is 3%, your CLV is $4,166. Your cost per acquisition will basically tell you if this is a great customer or not. If you acquired the customer for less than $1,000, this should be a profitable customer. Go get more of them right now.

Your SaaS business has an ARPU of $650, and churn is 16%, your CLV is $4,062.50. Compared to the above example, the CLV is pretty close even though the ARPU is much higher. However, you can see how high churn can really hurt the overall value a business obtains from its customers.

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