Your financial model is full of metrics, but Customer Lifetime Value is the one that tells the real story. CLV proves exactly how much revenue a specific customer brings in over time. By weighing this against your acquisition costs, you see if your business model actually works. It separates sustainable growth from burning cash.
Many finance teams struggle to turn this concept into a usable number. They get stuck on which formula to use or how to integrate it into their forecasts. This guide solves that. You’ll find clear definitions, trusted formulas, and relevant benchmarks. We also show you how to calculate CLV in Runway, giving model owners the control they need to build accurate scenarios without vendor bottlenecks.
What is customer lifetime value (CLV)?
CLV measures the total revenue or profit a customer generates throughout their time with your company. It's a forward-looking metric. You get to see not just what a customer is worth today but also what they'll add in the future.
For finance teams, CLV is more than a vanity number. It's the bedrock of unit economics. Use it to set budgets for acquisition, focus on the right customer segments, and decide where to invest resources for retention and growth.
CLV is the core input for calculating customer lifetime value in your financial models. It ties directly to revenue forecasts, margin assumptions, and retention drivers.
Why track CLV
CLV gives you a clear view of long-term profitability. It helps you answer key questions:
- Are we spending too much to acquire customers?
- Which segments should we focus on?
- How does retention impact our bottom line?
Finance teams use CLV for smarter budgeting and forecasting. When you know a customer's lifetime value, you can set real targets for sales and marketing. You can model how improving retention or growing accounts affects financial performance.
CLV matters to investors. The LTV:CAC ratio comes up fast in any conversation. A strong ratio proves your model works and shows you’re not burning cash to bring in customers who won’t stick around.
Key components and considerations in calculating CLV
Before choosing a formula, get clear about your inputs. What goes into CLV shapes your results.
Start with revenue. Decide if you’ll use gross revenue or net revenue (after refunds and chargebacks). Net revenue paints a more accurate picture, especially if refunds or payment failures are common.
Then, define customer lifespan. This is the average time a customer stays active. For a subscription business, calculate it as the inverse of your churn rate. For transactional businesses, look at purchase frequency and time between purchases.
Margins matter. Revenue-based CLV shows what a customer brings in. Profit-based CLV shows what you actually keep after costs. You can look at gross margin (revenue minus cost of goods sold) or contribution margin (subtracting variable costs like support and retention too).
If you’re in subscriptions, split recurring revenue from one-time purchases. Recurring revenue is predictable and builds over time. One-time revenue is tougher to forecast and doesn’t boost retention.
Expansion revenue counts. Customers who upgrade, add seats, or purchase extras lift your CLV. This is where net revenue retention comes in. If expansion outpaces churn, your CLV jumps.
Remember costs. Support, success teams, and retention programs reduce your real profitability. If you want a contribution-margin-based CLV, factor in these expenses.
Your business model matters. If you have freemium, mixed revenue streams, or rely on a handful of high-value customers, averages won't tell the full story. Segment CLV by cohort, plan, or customer type for real clarity.
Common CLV formulas and variations
No single formula for CLV fits every business. Your choice depends on your model, available data, and the precision you want.
Simple CLV formula
The most basic way multiplies average purchase value by purchase frequency and average customer lifespan:
CLV = Average purchase value × Purchase frequency × Average customer lifespan
This fits transactional models like e-commerce. If your average order is $50, customers buy twice a year, and stay for three years, your CLV is $300.
But this simple approach ignores churn, margins, and time value. Use it as a starting point, not the whole picture.
Traditional SaaS CLV formula
For subscriptions, use average revenue per user divided by churn rate:
CLV = ARPU ÷ Churn rate
If ARPU is $100 per month and monthly churn rate is 5%, your CLV is $2,000. This formula assumes steady churn and skips expansion or contraction.
You can make this stronger by multiplying ARPU by gross margin and average lifespan, or dividing ARPU and gross margin by churn rate. Both give you a margin-adjusted look at value.
Gross-margin-adjusted CLV
To see true profitability, multiply revenue-based CLV by gross margin percent:
CLV = (ARPU ÷ Churn rate) × Gross margin %
If CLV is $2,000 and gross margin is 70%, you keep $1,400 per customer in profit. Now you know exactly how much cash you generate from each user after covering direct costs.
Discounted cash flow (DCF) approach
If your customers stick around for a long time, the time value of money matters. This approach discounts future cash flows to today’s value:
CLV = Σ (Revenue_t × Gross margin % × Retention rate_t) ÷ (1 + Discount rate)^t
This formula is more complex, but also more accurate. It shows that a dollar today is worth more than a dollar next year. You'll choose a discount rate (often your weighted average cost of capital) and model retention over time.
Cohort-based CLV method
Looking at company-wide averages can hide details. Cohort-based CLV groups customers by acquisition period. You track each cohort’s revenue, retention, and expansion, and then calculate CLV for each group.
This method is more accurate. It spots differences between cohorts and catches trends early so you can fine-tune your strategy.
Linking CLV to other key financial metrics
CLV connects to almost every major financial metric you track.
Customer acquisition cost (CAC) is the most direct pairing. CAC tells you what you spend to bring in a customer. CLV shows what that customer brings in over time. Together, you get a true view of business viability.
CLV connects to payback period too. Payback shows how long it takes to recoup CAC through gross margin. The faster the payback, the quicker you can reinvest in growth.
Churn and retention rates are critical. Lower churn leads to longer customer lifespan and higher CLV. Small retention improvements compound into a much higher lifetime value.
Average revenue per user (ARPU) is the key lever in calculating CLV. Improving ARPU boosts LTV, strengthens your LTV:CAC, and speeds up acquisition payback.
Expansion revenue and net revenue retention drive CLV even higher. Customers who add seats or upgrade lead to bigger LTV, while churn pulls it down. When expansion beats churn (NRR over 100%), LTV jumps.
All these connect in your unit economics. CLV represents the revenue side. CAC, gross margin, and operating costs cover expenses. Strong unit economics mean you can scale profitably and sustainably.
Benchmark ranges and rules of thumb
Benchmarks differ by industry, business model, and customer type. But there are a few helpful rules of thumb:
- For SaaS, LTV:CAC usually falls between 3:1 and 5:1. Recent data shows high performers reaching closer to 4:1. B2B SaaS often aims even higher, up to 8:1, with longer contracts and lower churn.
- Payback periods for fast-moving companies are often 12-18 months. Product-led and SMB models target 6-12 months. Enterprise deals sometimes take 18-24 months, but only when retention and LTV are strong.
- Subscription businesses see higher CLV than transactional models thanks to recurring revenue and strong retention. In e-commerce, CLV usually runs 1.5 to 3 times a customer’s first purchase.
- B2B CLV is typically 3 to 5 times greater than B2C. Enterprise customers usually have 2 to 4 times the CLV of SMBs because of longer contracts and larger deals.
- Top quartile SaaS teams hit LTV:CAC ratios above 5:1 by improving retention, growing revenue inside accounts, and controlling acquisition costs.
CLV should rise over time. Retention and expansion growth drive it higher. If your CLV stays flat, review churn or think about how to increase the value you deliver to existing customers.
Common pitfalls and how to avoid them
CLV looks simple at first, but it's easy to trip up.
- Don’t confuse revenue-based CLV with profit-based CLV. Revenue shows what a customer brings in. Profit tells you what stays after costs. Make decisions using profit-based CLV for a clear picture.
- Factor in the time value of money. For long customer relationships, a dollar next year is worth less than a dollar today. Don’t skip discounting future cash flows.
- Averages can hide outliers. Customers acquired through different channels, or those on monthly versus annual plans, may have very different CLVs. Segment by cohort, channel, or plan.
- Include support, success, and retention costs when you want to know contribution margin. These expenses weigh on profitability and shouldn’t get left out.
- Use realised revenue, not just contracted revenue. Customers may churn, downgrade, or miss payments. Actual cash is what counts.
- Account for seasonality or promotions. A high-growth period can make CLV spike. Don’t assume one quarter’s numbers reflect the full picture.
- Model high-value customers separately if a few accounts drive most of your revenue. Company-wide averages won't always tell the real story.
How to calculate customer lifetime value in Runway
Runway lets you calculate CLV with your real data, not just static spreadsheets. You can pull in ARPU, churn, margins, and expansion all in one place. Instantly see how changes in any area impact lifetime value.
Start by connecting your accounting and CRM systems. Runway uses this data to track revenue and customer counts. Set up a database for your monthly revenue and one for your active users or accounts. Make sure both share common dimensions, like “customer” or “plan”, for precise aggregation and filtering.
Build your ARPU driver. Create a driver for total recognized revenue: sum(Contracts.Monthly Recognized Revenue). Then, create one for total active users: sum(Seats.Active Users). Your ARPU driver is ifError(Total Recognized Revenue / Total Active Users, 0). Segment by plan, geography, or any dimension with dynamic matching.
Add churn and retention drivers. Bring in subscription MRR data from your revenue system with one row per subscription and MRR as a time series. Add drivers for new MRR, upgrade MRR, downgrade MRR, and churn MRR using if logic that compares current and prior MRR. Then roll these up at the model level: start MRR, expansion MRR, contraction MRR, churn MRR total, and create your NRR % driver.
For a simple CLV calculation, use CLV = ARPU ÷ Churn rate. To account for margins, multiply by gross margin percent: CLV = (ARPU ÷ Churn rate) × Gross margin %
To include expansion, use this formula: CLV = (ARPA × Gross margin %) ÷ (Churn rate - Expansion rate). This factors in growth from customers who keep upgrading.
For cohort-based CLV, set up a cohort database by period, geography, or product line. Add drivers for seats, contract value, and cohort-level revenue. Store seat growth rates in an assumptions database. Apply these rates monthly to see changes as your cohorts mature. Roll up cohort data for full visibility, but keep drill-downs open for deeper insights.
Runway models CAC and payback period right alongside CLV. Sync your general ledger and CRM so CAC updates automatically. Build drivers for new customers, acquisition spend, and blended CAC: ifError(Acquisition Spend / New Customers, 0). Calculate your LTV:CAC ratio and payback period right in the same workspace.
The biggest advantage? CLV in Runway updates in real time. When your churn moves, CLV moves with it. Model a new plan or retention push and see the impact instantly. Compare scenarios side by side. Share your analysis with teammates and collaborate easily.
Go beyond the definition
Customer lifetime value drives smarter decisions. It tells you exactly what customers are worth, where to invest, and helps you determine if your business model scales.
But accurate calculations inside your financial models are essential. Runway puts everything in one place so you don't have to chase numbers. You can track ARPU, churn, margins, and expansion in real time. Segment by cohort or plan to see how every change affects lifetime value.
Ready to forecast better and build models that drive growth? Start now with Runway to stop firefighting and start leading with actionable, real-time metrics.