What Is Customer Lifetime Value (CLV)?

Customer Lifetime Value (CLV) is an estimate of the total net profit a business expects to earn from a single customer over the entire span of their relationship. It helps you understand how valuable each customer is, not just on their first purchase, but over time as they renew, upgrade, or buy more.

How to Calculate CLV

Here’s a simple formula, especially handy for subscription-based (SaaS) businesses:

CLV = (Average Revenue per Account per Month(ARPA) × Gross Margin %) ÷ Monthly Churn Rate

Example: 

Let’s imagine you run a team-scheduling SaaS tool:

ARPA: $50 per month

Gross Margin: 75%

Monthly Churn Rate: 4% (0.04)

Step-by-Step Calculation

Multiply ARPA by Gross Margin:

$50 × 0.75 = $37.50

Divide by Churn Rate:

$37.50 ÷ 0.04 = $937.50

So, CLV ≈ $938 per customer.

A CLV of $938 means that, on average, each customer will bring in about $938 in profit over their lifetime with the team-scheduling SaaS tool.

Why CLV Is Important

Informs Marketing Spend: Knowing CLV lets you decide how much you can comfortably spend to acquire a new customer without losing money.

Guides Customer Retention Efforts: If you see that customers generate significant long-term value, you’ll invest more in onboarding, support, and loyalty programs.

Shapes Product & Pricing Strategy: Understanding lifetime value can justify premium features or tiered pricing that boost revenue per user.

Improves Forecasting & Budgeting: Accurate CLV lets you project future revenue based on current customer counts and churn rates.

Attracts Investors: A healthy CLV: CAC ratio (commonly 3:1 or better) signals a sustainable growth model to stakeholders.