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When a new customer joins your book of business, there are some things that are known right out of the gate. The 'sale' of a new customer – aka the monetary amount of the contract – is often looked at as the be-all-end-all metric to determine the value of the customer. This number is also used to determine ARR (annual recurring revenue), which shows how much revenue will come in each year from this initial contract.
However, there is an additional metric used by customer success teams (and, more recently, proactive executive leadership teams) to calculate the value of a customer beyond just what is outlined in the initial contract: Customer Lifetime Value (CLV).
Instead of looking at a customer's one-time, bottom-line value based on contract, Customer Lifetime Value looks at how valuable a customer can be to an organization over time, both in the quantitative and qualitative sense. First, there is the monetary value – looking ahead, what revenue can you predict the customer to bring in throughout their entire relationship with your organization. This includes the initial contract, of course, and any upsells, expansions, and renewals that may occur.
Second, there is the value a customer account can bring outside of traditional revenue. Think about any potential product enhancement requests, advisory board placements, case study potential, customer speaking engagements, etc. As any CSM knows, more goes into a customer than just revenue, and the most valuable customer accounts offer the potential for all of these strategic initiatives.
With so many different data points informing a metric like Customer Lifetime Value – not to mention that much of this information is forward-leaning and may not be readily on hand – it's easy to assume that calculating Customer Lifetime Value can be tricky. However, with the right formula in hand (and the data to back it up), you can easily calculate Customer Lifetime Value at a customer or company aggregate level.
Here's a good starter formula to begin with:
To come up with each of the points above, you must be able to assign numbers to each data point:
Ready to Learn More?
You can learn more about customer success metrics and how to calculate Customer Lifetime Value with these additional resources from ClientSuccess:
