How to Calculate Customer Lifetime Value | The #1 Most Important Metric in Ecommerce

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.

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