Customer Lifetime

1. Definition

• Customer Lifetime = how long, on average, a customer continues to buy from or use your business before churning (leaving).
• It is usually expressed in time units (months, years).
• Often used as an input to Customer Lifetime Value (CLV / LTV), which is the revenue/profit generated over that period.

It answers: “How long do customers typically stay with us before they stop?”

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2. Formula (basic)

If you know the churn rate (percentage of customers lost per period):

$\text{Customer Lifetime} \approx \frac{1}{\text{Churn Rate}}$

Where:

• Churn rate = % of customers lost in a given period (e.g., monthly churn).
• Customer lifetime = expected number of periods a customer stays.

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3. Example

• Monthly churn rate = 5% (0.05).

$\text{Customer Lifetime} = \frac{1}{0.05} = 20 \text{ months}$

On average, a customer stays 20 months.

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4. Usage

• CLV Calculation:
  • $\text{LTV} = \text{ARPU} \times \text{Gross Margin} \times \text{Customer Lifetime}$ (where ARPU = Average Revenue per User).
• Forecasting → Helps predict future revenue streams.
• Unit economics → Used with CAC (Customer Acquisition Cost) to check if customers are profitable:
  • Healthy rule of thumb: LTV : CAC ≥ 3:1.

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5. Limitations

• Assumes churn is constant (but in reality, churn varies by customer cohort, time, or product).
• Sensitive to churn mismeasurement (small changes in churn → big swings in lifetime).
• For SaaS/retention-based businesses, often refined with survival analysis or cohort analysis for accuracy.

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Summary:
Customer Lifetime = average duration a customer stays before churning.
Approximation: $1 / \text{churn rate}$.
It’s a key input to LTV and is used to measure sustainability vs CAC.