Customer lifetime value (CLV)

One of the most critical metrics in the revenue phase is the customer lifetime value. The metric describes the total revenue generated by a customer over their lifetime. This metric shows you how much you can spend on acquiring new customers and if your business model runs profitably.

Customer lifetime value vs. customer acquisition cost

The customer lifetime value shows you how much you can invest in acquiring new customers. If you invest more money in acquisition than what you will eventually get from a customer, your business will fail. A good rule of thumb is to have a customer lifetime value to customer acquisition ratio of 3:1. To find the channel with the lowest CAC and the highest return, apply the Bullseye Framework, developed by Gabriel Weinberg.

Not all customers are the same, and not all revenue is created equally. Therefore, it is important to find out which customers are most valuable to you. A great framework to find your best customer segment is the PVP index, developed by Allan Dib, author of the 1-Page Marketing Plan.

The PVP Index helps you find the market segmentation which gives you personal fulfillment, values your work, and drives revenues. Determine each market segment and rate them, based on the PVP Index, on a scale of 1 to 10.

• Personal fulfillment: How much do you enjoy dealing with this type of customer?
• Value: How much does this market segment value your work?
• Profitability: How profitable is the work you do for this segment?

Once you have found your ideal customers, you can use your marketing budget more effectively and improve your revenue quality.

How to calculate LTV

Calculate the customer lifetime value like this:

Customer lifetime value = Average revenue per customer * (1/churn rate)

For example, if your average monthly revenue per customer is €100 and your churn rate is 5%, this means that your customer lifetime value is €2000.

CLV = €100 * (1/0,05)

Be careful not to mix your annual subscriptions with the monthly ones. Otherwise, you might lull yourself into a false sense of security.

How to improve the LTV

• Raise your prices
• Reward people to upgrade
• Make upgrading to higher plans easy
• Use up-sells and cross-sells
• Create bundles that offer a discount for larger purchases
• Keep customers engaged
• Provide value regularly
• Improve and expand your service

Does that look Greek to you? Do you need help with your Product, Strategy or Business? I can help, lets talk!