Calculating Customer Lifetime Value for Startups

Acquiring and holding onto long-term clients is vital if you want to grow your startup. Afterall, it is your customers who bring in the revenue and keep the proverbial ball rolling. To reduce your startup’s consumer churn rate and maintain loyalty, you will need to understand how your clients behave which requires a certain level of analysis. One of the important steps you can take is to calculate your client’s lifetime value (CLV) for your startup. Determining your client’s lifetime value has many benefits geared towards your startup’s longevity and sustainability. Calculating your CLV will help you to establish whether the profit you are receiving from each client over their lifetime is greater than the cost to acquire them. The process will also inform your go-to-market efforts, inform your startup’s budget, and assist you in identifying your target market.

What is Customer Lifetime Value?

Customer lifetime value (CLV) is also referred to as the lifetime value of a customer. It is a well-known marketing metric that allows founders to determine how much a single client will spend with your startup over the course of your startup relationship. To put it simply, it is the total amount of money a client is projected to spend on your services.

How to Calculate Customer Lifetime Value for Your Startup

When it comes to calculating a customer’s lifetime value for your startup, the process is relatively simple, but will typically require a set of metrics. Your metric or your formula will vary depending on your startup’s business model and offering. Generally, the formula can be as simple as:

the average value of one spend
x
the number of purchases or expected purchases in a given year
x
the length of the startup relationship (in years).

If you have a SaaS or subscription-based startup business model, your formula might look like this:

average revenue per account (ARPA)
÷
churn rate (percentage at which clients stop subscribing to a service).

A SaaS or subscription-based startup business model can be more complex depending on your service offering, your growth and churn rate. Often, founders like to section their clients by time periods or ‘cohorts’. For example, the number of new clients acquired in December. This helps founders to determine their startup’s cohort evolution.

You’ve Calculated Your Customer Lifetime Value… Now What?

Once your startup has calculated your customer lifetime value, you will be able to use this data to grow your startup. It will assist in identifying certain segments to target and inform where you should be applying your marketing efforts. For example, if a certain cohort or service has a high customer lifetime value, you can focus your time and resources there.
Need Help? Contact Us

At Allied Legal, we are experts on all thing’s innovation. Not only do we assist startups with their sales and business development needs, but we provide expert solutions to your startup’s legal needs. You can connect with one of our commercial lawyers by giving us a call on 03 8638 0888 or by sending us an email at hello@alliedlegal.com.au.