Definition:

Customer lifetime value is the amount you expect a customer to spend on your products over the course of their relationship with your company.

Example:

You sell subscriptions to a productivity tool you have created. Subscribers pay $10 per month, and on average subscribe for 30 months before they cancel their subscription. The lifetime value of these customers is $10 x 30 months = $300

Why it matters:

Customer lifetime value is another important business metric. It is always paired with the idea of customer churn, since if you never expect a customer to cancel their subscription, or stop purchasing from you their CLTV is infinite.

There are two popular but conflicting definitions of lifetime value.

1. The most common is simply the sum of the revenues we expect to earn per customer over their lifetime. We recommend calling this Customer Lifetime Revenue (CLTR)
2. A useful alternative is the net cash contribution (or value) that each customer will provide. We recommend calling this Net Customer Lifetime Value (nCLTV) as it is then clear that some costs have also been included.
   • The calculation starts with the sum of lifetime revenues and subtracts customer acquisition costs and any variable costs needed to provide the products or services consumed over the customer lifetime.
   • Fixed costs should never be allocated to customers when calculating the nCLTV.
   • A positive nCLTV tells you that scaling your business will increase profits, whereas a negative nCLTV tells you that you will need to reduce acquisition costs, improve unit economics or lengthen customer retention before thinking about scaling.