Customer Lifetime Value
How much is one customer really worth
Customer lifetime value (CLV) is the present value of the profit a customer will generate over their relationship. It sets the ceiling for acquisition spend and underpins payback and LTV:CAC ratios.
What you will learn
- Estimate CLV from average revenue, margin, retention rate, and discount rate
- Compare simple, cohort, and predictive CLV methods and their trade-offs
- Use CLV to set acquisition cost ceilings and compute LTV:CAC
What is this?
Customer lifetime value (CLV or LTV) is the total gross profit attributed to a customer over their entire relationship, discounted to today. The classic formula is ARPU × gross margin / (1 − retention rate). It answers: how much can we afford to spend to acquire a customer and still come out ahead?
Why do you need it?
- It sets the rational ceiling for customer acquisition cost.
- LTV:CAC is a board-level health metric for subscription and consumer businesses.
- Improving retention multiplies LTV non-linearly, so CLV justifies retention investment.
Mental model
A customer's revenue stream over years
A bond or annuity
Both are a stream of cash flows you must discount back to net present value to judge whether today's investment is worth it.
How it works
- Compute average revenue per user (ARPU) and gross margin per user.
- Estimate retention rate (monthly or annual) from cohort curves.
- Apply CLV = margin per period / (1 − retention rate), adding a discount rate for longer horizons.
- Divide CLV by CAC to get LTV:CAC; require it above the payback target for growth spend.
CLV compounds the value of every extra period a customer stays.
In production
- Finance gates marketing spend on LTV:CAC thresholds.
- Product teams size retention improvements by their CLV uplift.
- Pricing teams test tier changes against CLV impact, not just short-term ARPU.
Best practices
- Be explicit about margin vs revenue, discount rate, and periodicity; CLV numbers are meaningless without their assumptions.
- Report CLV by cohort because early and mature customers have very different values.
Common mistakes
- Using one average retention rate for all cohorts when retention changes over time.
- Forgetting to subtract cost, computing CLV on revenue rather than margin.
Debugging tips
- If CLV looks implausibly large, check that the retention rate is not the same for every cohort.
- If LTV:CAC is suspiciously stable, confirm that both numbers were recomputed on the same date.
Interview checkpoint
Hands-on lab
- Estimate CLV from margin, retention, and discount rate
- Compute LTV:CAC given acquisition cost
- Model the effect of retention improvements on CLV
Customer Lifetime Value Calculator
35 min · intermediate
Quick quiz
CLV is computed using
Halving the churn rate (doubling retention) roughly