The Customer Lifetime Value (CLV) describes the total economic value that a customer generates for a company over the course of the business relationship. This metric is also known as customer lifetime value or Lifetime Value (LTV). Depending on how it is calculated, it takes into account either the expected turnover or the contribution margin over the entire duration of the customer relationship.
For start-ups, this metric is particularly important for assessing the long-term profitability of customer relationships. It enables them to make informed decisions in marketing, sales and product management.
What factors influence customer lifetime value?
Customer lifetime value depends on how often customers make purchases, how much revenue they generate and how long they remain loyal to the company.
The most important factors include:
- Average turnover per customer: How much turnover does the company generate per purchase or billing period?
- Frequency of purchase: How often do customers buy a product or use a service?
- Customer retention period: How long will the business relationship last?
- Profit margin: What proportion of turnover remains after deducting the directly attributable costs?
- Churn rate: What percentage of customers drop out within a given period?
Longer-term customer loyalty and repeat purchases can increase the economic value of a customer relationship. A high churn rate, on the other hand, often has a negative impact.
How is customer lifetime value calculated?
Start-ups can use a simplified formula for an initial estimate:
Revenue-based CLV = average annual revenue per customer × average customer retention period in years
If profitability is also to be taken into account, the expected turnover can be multiplied by the contribution margin:
Contribution-based CLV = average annual revenue per customer × contribution margin × average customer retention period in years
For the sake of simplicity, these calculations assume that turnover and margin remain constant over the period under consideration. More accurate models take into account, for example, changes in purchasing behaviour, customer churn and the present value of future earnings.
Example: How can you calculate customer lifetime value?
A SaaS start-up offers software to businesses on a subscription basis. Average revenue stands at 100 euros per month per customer.
Assuming an estimated customer retention period of three years, the calculation is as follows:
€100 × 12 months × 3 years = €3,600
The revenue-based value of a customer relationship is therefore 3,600 euros.
If the contribution margin is 80 %, this results in a contribution-based value of 2,880 euros before deduction of acquisition costs.
This example illustrates why start-ups should take costs into account as well as turnover.
Why is customer lifetime value important for start-ups?
This metric helps companies assess the long-term value of their customer relationships and tailor their growth strategy accordingly.
It is particularly relevant to the following decisions:
- Assessing the profitability of individual customers
- Use marketing and sales budgets more effectively
- Identifying opportunities for customer loyalty and additional sales
- Further developing pricing and the business model
- Planning long-term growth strategies
An important benchmark is the Customer Acquisition Costs (CAC). These describe the average cost of acquiring new customers.
If the expected contribution margin from a customer relationship is significantly higher than the acquisition costs, this may indicate an economically viable business model. However, other costs and the timing of revenue must also be taken into account.
You can find out more about how to interpret these key figures in the innoWerft article on the Key growth indicators for start-ups.
How can businesses increase customer lifetime value?
Start-ups can take various steps to derive greater long-term value from existing customer relationships:
- Improving customer loyalty: Through good service, reliable products and regular feedback.
- Improving customer satisfaction: Identify problems at an early stage and optimise the user experience.
- Generate additional revenue: Develop suitable additional services or higher-value offerings.
- Reducing customer churn: Analyse the reasons for resignations and implement targeted improvements.
- Optimising costs: Make recurring processes more efficient and increase profitability.
Which measures are appropriate depends on the business model and the needs of the target group.
How can innoWerft help with this?
innoWerft helps founders to define relevant KPIs, further develop their business models and review their growth strategies. Through coaching and feedback, start-ups can carry out targeted analyses of their customer retention, profitability and long-term scalability.
Frequently asked questions about customer lifetime value
What does CLV mean in German?
The abbreviation stands for Customer Lifetime Value. It describes the financial value of a customer relationship over its entire duration.
What is the difference between CLV and CAC?
Customer lifetime value describes the revenue or economic contribution of a customer relationship. Customer acquisition cost (CAC), on the other hand, shows how much it costs to acquire new customers. Both metrics help to assess the profitability of customer acquisition.
What constitutes a good customer lifetime value?
A good value depends on the business model, profit margins and customer acquisition costs. The key factor is that the expected revenues are sufficient in the long term to cover the costs incurred and generate a positive economic contribution.
How does the churn rate affect customer lifetime value?
A high churn rate means that many customers leave the company within a given period. This often shortens the average customer retention period and reduces the expected economic value.
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