Key Takeaways
- CLV determines how much you can afford to spend acquiring a customer while remaining profitable.
- A healthy business has a CLV:CAC ratio of 3:1 or higher: each customer generates 3x what it costs to acquire them.
- Increasing retention by 5% increases profits by 25-95%, making retention the highest-leverage CLV driver.
Calculating and Using CLV
Two approaches to calculating CLV:
- Historical CLV: Average revenue per customer over their actual lifespan. Simple but backward-looking.
- Predictive CLV: Uses purchase patterns, churn probability, and expansion likelihood to forecast future value. More useful for strategic decisions.
Application
Use CLV to set your maximum Customer Acquisition Cost (CAC). If CLV is $10,000, you can afford $3,000 CAC and still achieve a healthy 3:1 ratio. This guides marketing budget allocation across channels based on their acquisition cost.
Frequently Asked Questions
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