How to Calculate Customer Lifetime Value | The #1 Most Important Metric for Startups

We learn how to calculate customer lifetime value in Excel and discuss why this is THE MOST important metric for operating a successful subscription-based business.

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In this video, we walk through a customer lifetime value (aka LTV or CLV) example of a subscription-based startup, build a model to forecast the lifetime value of their customers, and finally use this information to try to understand how much the company can spend in advertising.

The reason why so many famous technology startups are able to lose money in early years, and then make money later on, is because they understand how to calculate customer lifetime value.

Subscription companies (like SaaS or ecommerce businesses) often need to spend a lot of money to get new customers to sign up for their products - so they have a very high marketing costs to win over new clients (customer acquisition costs or "CAC").

But, the reason they can pay so much in marketing is because each customer has a "lifetime", or an average number of months that they continue paying for their subscription, before they eventually cancel. This customer lifetime has a value that you can estimate with a customer lifetime value model.

During this customer lifetime, the company makes back the money it spent in marketing to acquire the customer (the CAC they spent to get the new client), and after that payback period, the company begins making profit on the customer.

For this reason, knowing how to calculate the customer lifetime value is the key to operating a successful subscription-based company and raising venture capital funding.

#customerlifetimevalue #clv #saas #startups

[akshatb]

You just saved my life!!! Thank you for making this video <3

[BenChipman-zwmq]

Thanks Eric, walking through it month by month helped me see my mistakes!

[RankaNikunj]

3:44 i didn't understood that Average Lifetime formula. Why did you do 1/22% ? Please explain

[davidanderson]

THANK YOU!! Such a good breakdown! I'm in a marketing undergraduate program right now, and the way it was written out in the textbook looked like a hieroglyphics.

[anuraagkhandelwal]

Good video. I'm curious how do we arrive at the formula of Lifetime months = inverse of churn. What is the logical/mathematical explanation of the formula?

[keyspanmusic]

Nice explanation. Brings to mind the importance of identifying/establishing a customer demand (top of funnel) first before launching a product or service, since that can be so impactful at controlling the CAC (since there is a population that already wants to buy), and also can help drive the CLV (e.g. as customers who adopted more organically may tend to be more valuable over the long term). Thanks for sharing!

[bellbellbell]

These are such helpful videos Eric - thank you!

[sotoandradegerardoandrei]

Hi, in 5:08 you’re saying that $92 it’s the Cliente lifetime value and you’re saying that you can spend a little bit more than that for the acquisition of each client, I understood if I spent $92 in this example I will make $0 dollars, and I spent more than $92 I will lose money, so I need to spend less than $92 to make a gross profit, im i right?, thank u!

[MosleepLesserproblems]

Great video, Eric! Thanks for the crisp walk through.

[ranjithpm]

Great explanation Eric, and thanks for sharing. One quick question, at 7:30 you had mentioned on an estimated CAC of 50 USD. Can you please elaborate on that estimation, or a mathematical formula for making a standard approximation for preparing a budget for marketing spends?

[goodplant]

Thanks for simplifying the computation. Some teachers use a difficult formula like an art form.

[peterhabibjn]

Great video. It helped me calculate a key business metric that I did not know how to get.

[babekallahverdizade]

Hi Eric, thank you for the fantastic explanation. Thanks to you I'm almost ready to launch my startup business! :)

[josbjosb]

ERIC. Thank you man, you are incrideble.

[henkeverton]

Hey, Eric! Everton from Brazil :)
I was looking for some content with the deep dive as you provide. Thanks! but, as others comments, I don't got it the logic through de Avg Lifetime 1/%. Until now, it didn't make sende for me. Please, could you explain?

[skid-edqk]

Thanks for sharing. hand down for this!!. such a informative and practical CLV video.

[daniellenapoli]

Thank you for this. I did have a few questions but will let my thoughts simmer on this before asking. Sometimes the answer is right there. Really helpful!

[gurpreetsokhi]

This video was super helpful and easy to understand - thank you!

[raulsiqueirayt]

Very great video Eric! Thank you so much :)

[batoolhijjawi]

I loved your explanation, Thanks for your efforts. You got a new subscriber! :)