Customer Lifetime Value, or short CLTV or LTV, is a metric that measures the amount of money that customers spend on a business over their lifetime.
Example: A Customer subscribes to a product and pays $10/month for 3 months.
After those 3 months, he stops using the product and churns.
The Lifetime Value of this customer is 10x3 = $30.
Since the Lifetime Value of a single customer doesn’t tell you much about the state of your product, you usually calculate the average CLTV.
Example: You have 100 customers that spent $120 on your product and 100 customers that spent $150 on your product. Your average CLTV is $135.
CLTV is a key metric for most products.
The metric is mostly important for product and marketing teams.
CLTV is crucial for marketing because it determines the amount of money marketing can spend to acquire a new paying customer.
Example: If the average CLTV is $30, marketing can spend $29 to acquire a new customer and the business would make a profit. If marketing spends $31, the business is losing money.
But CLTV is also important for product teams. It tells product managers how much money people are willing to spend for a product.
If a product has a lot of free active users, but paying users churn without spending a lot of money, the paid product might need improvement.
It can also be important to look at the CLTV of user segments.
Example: A lot of apps have a small amount of power users that are spending a lot of money on the product. These users might make up only a small percentage of the user base, but they are responsible for a big percentage of the revenue that an app makes.