Customer Lifetime Value helps a business understand the average value of a customer over the lifetime of their spending with the business. Knowing the terminology is an important aspect of running a startup and startup investing. Startups often use specialized language and technical terms to describe their business models, products and strategies. By understanding this terminology, investors can better understand the startups they are considering investing in. Meaning investors can make more informed decisions about whether to invest in a particular startup.
What Is Customer Lifetime Value?
In the world of startup investing, customer lifetime value (CLV) is an important metric. It can provide valuable insight into a startup's potential success. CLV represents the total revenue that a customer will generate for a company during their lifetime with the company. It can also help investors assess the long-term potential of a startup.
Why Is CLV Important In Startup Investing?
A high CLV can indicate that a startup's customer base is valuable. Meaning each customer has the potential to generate a significant amount of revenue for the company. This metric makes the startup more attractive to investors as it suggests that the company has a strong business model and a sustainable source of revenue.
Conversely, a low CLV can indicate that a startup's customer base is not as valuable. This means the company may have difficulty generating enough revenue to be successful. The startup may then be less attractive to investors as it suggests that the company may have challenges in growing its business and achieving profitability. It could also indicate larger issues within the startup. For example, it might indicate low demand for the product or the inability to properly market its product.
However, CLV is not the only factor that can affect a startup's success. Other factors, such as the quality of the startup's products or services, its competitive advantage, the strength of the startup's founders and its market opportunity, can also play a role in determining a startup's success.
What Is A Good CLV?
Generally, a good CLV is based on how far it exceeds the customer acquisition costs (CAC). For some businesses, the actual CLV might just be one or two purchases resulting directly from a holiday special or marketing event, while others might be much higher from subscription models. But that's why it's important to use averages when calculating CLV.
Whether something is a good CLV varies by business type and model. So it’s important to consider the business as a whole.
It’s important to also analyze CLV trends in a startup. If a startup has a low CLV but it is on the rise, this might indicate too small a customer pool. Meaning the startup might have future difficulty in acquiring new customers profitably. But a startup with a high CAC that is dropping might be showing promising signs of future profitability.
Using Customer Acquisition Cost (CLV) And Customer Lifetime Value Together
Customer Lifetime Value and Customer Acquisition Cost are two important metrics in the world of business and startup investing. CLV is the total revenue that a customer will generate for a company over the course of their lifetime. CAC is the cost that a company incurs to acquire a new customer.
CLV and CAC are often used together to help businesses understand the cost-effectiveness of their customer acquisition strategies. A high CLV and a low CAC can indicate that a company is successfully acquiring new customers at a low cost and that these customers are generating a significant amount of revenue for the company. These numbers can make the company more attractive to investors as it suggests that the company has a sustainable business model and a good chance of success.
On the other hand, a low CLV and a high CAC can indicate that a company is struggling to acquire new customers and that these customers are not generating much revenue for the company. The company may appear less attractive to investors as it suggests that the company could have challenges in growing its business and achieving profitability. These measurements can be an indicator of broader issues like a lack of demand for the product, too small a customer base or poor marketing strategies.
CLV and CAC are two important metrics that can provide valuable information about a company's customer acquisition strategies and potential success. By analyzing CLV and CAC, businesses and investors can better understand the cost-effectiveness of a company's customer acquisition efforts and make more informed decisions about the company's future prospects.
How To Calculate Customer Lifetime Value
To calculate CLV, you first determine the average amount that a customer spends on a company's products or services. Do this by finding the total amount spent divided by number of orders.
Example:
- $10,000 in revenue generated
- 100 separate customers
- $100 average customer spend
Next, calculate out how many times the average customer is expected to make a purchase over their lifetime. Calculate this dividing the total number of orders by total customers.
Example:
- 1000 orders
- 500 customers
- 2 average lifetime orders per customer
Once you have these two values, you can calculate CLV. You do this by multiplying the average amount that a customer spends on a company's products or services by the average number of times that a customer is expected to make a purchase over their lifetime. This calculation will give you the total amount of revenue that a customer is expected to generate for a company over the customer's lifetime.
This calculation would look like this:
- Average spend per customer: $100
- Average purchases over customer's lifetime: 10
- Customer lifetime value = $100 x 10 = CLV = $1000
This can also be reverse-engineered.