As the term suggests, CLV is the value a customer holds in the business during their association. Therefore, it is the monetary contribution to the annual profits of the company that a customer has had.
CLV plays a huge role in subscription-based businesses that can better predict and analyze past trends to understand consumer behavior.
Any business can follow four simple steps to measure customer lifetime value.
The customer lifetime value (CLTV) is found by taking the average order value and multiplying it by the typical order frequency. Next, you’ll need to estimate the average customer lifespan before you can multiply that number by the value of a single customer to get the total lifetime value of your customers.
To understand a SaaS company’s CLV, we must look into an example to see the bigger picture.
Suppose that Firm A in question has a MRR (Monthly Recurring Revenue) of $1 million and has 50 paid subscribers. This means, their average order value would be $1 million divided by 50.
The data we have till now:
MRR: $1 Million
Average Order Value: $20,000
Average customer lifespan: 5 years
Therefore, by applying the formula that we discussed in the previous section, the CLV of each of these customers would be $20,000 x 5 = $1,00,000.