Customer Lifetime Value

Customer Lifetime Value represents the total revenue a business expects to earn from a customer over the entire relationship. This forward-looking metric helps product managers and business leaders make informed decisions about customer acquisition spending, retention investments, and segment prioritization. CLV is calculated using average revenue per user, gross margin percentage, and churn rate. A simple formula is ARPU times gross margin divided by churn rate. For example, customers paying one hundred dollars monthly with eighty percent margins and five percent monthly churn have CLV of one thousand six hundred dollars. More sophisticated models incorporate expansion revenue, discount rates for time value of money, and varying retention rates over time. CLV provides crucial business insights including maximum viable customer acquisition cost, which customer segments are most valuable, whether unit economics are sustainable, return on retention investments, and lifetime profitability by cohort. Product managers use CLV to prioritize features serving high-value segments, justify investments in retention and expansion, evaluate pricing changes, assess product-market fit across segments, and guide resource allocation. The CLV to CAC ratio indicates business model health, with healthy ratios above three to one. Improving CLV requires increasing revenue per customer through upsells and cross-sells, reducing churn through better product value and customer success, and improving gross margins through efficiency. Tracking CLV by cohort reveals whether product changes improve customer value over time.