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Lifetime Value (LTV) or Customer Lifetime Value (CLTV) is the overall value of a client to a company throughout the course of their entire relationship. This indicator estimates the average revenue that a customer will generate during its customer lifespan.
Customer lifetime value increases the more frequently a client purchases from a business.
Customer success teams and support teams have direct control over this measurement throughout the customer experience. CS managers and customer support representatives are crucial in resolving issues and making recommendations to improve customer retention and rate of churn.
Customer lifetime value (CLTV) is a business metric that measures how much money a company could potentially make over the life of an individual customer relationship.
In essence, it is a way of calculating how much customers are worth to an organization.
CLTV is an incredibly powerful metric that allows business owners to better understand their current customers.
The lifetime value calculation can help organizations identify whether or not their product, marketing, and sales efforts are working, determine whether they are losing money due to churn, or help them make informed decisions regarding pricing, product development, and marketing strategies, to name a few.
One thing that often gets overlooked when it comes to CLTV is churn. Churn is the percentage of customers who cancel within a certain period of time. For example, if the average churn rate is 10%, that means that every year, 10% of a company’s customers will leave.
When looking at CLTV, it is important to remember that churn affects both the numerator and denominator. The numerator is the average monthly spend on all customers. The denominator is the number of customers.
For SaaS SMB and mid-market businesses, a good rule of thumb is to keep monthly churn rates between 3% and 5%. However, for SaaS B2B established enterprises, a good monthly churn rate would be between 1 to 2%.
Having an understanding of a business’s customer lifetime value is crucial because: