What a client is worth in total
A client's lifetime value is their monthly fee divided by the monthly dropout rate, because a 10% dropout rate equals an average stay of 10 months. At a fee of 80 and 10% dropout, each client is worth 800 across the relationship. Halving dropouts doubles that figure without touching the price.
The formula
Lifetime value = Monthly fee ÷ Monthly dropout rate · Average stay = 1 ÷ Dropout rate
What each variable means
- Monthly fee
- What the client pays each month, with fees already removed if you want the net figure.
- Monthly dropout rate
- Share of clients leaving each month. Its inverse is the average stay in months.
- Cost to acquire a client
- Advertising, selling time and acquisition fees, spread across the clients who actually signed up.
Precomputed values
| Monthly fee | 5% (20 months) | 10% (10 months) | 15% (6.7 months) | 20% (5 months) |
|---|---|---|---|---|
| 50 | 1.000 | 500 | 333 | 250 |
| 80 | 1.600 | 800 | 533 | 400 |
| 120 | 2.400 | 1.200 | 800 | 600 |
| 200 | 4.000 | 2.000 | 1.333 | 1.000 |
Moving along the row, by raising the price, has a linear effect. Moving along the column, by retaining better, has a far larger one: from 20% to 5% dropout the value multiplies by four.
Run it on your numbers
How to read the result
Lifetime value is the number that tells you how much you can spend to get a client. If each is worth 800 and costs 100 to acquire, the ratio is 8 to 1 and there is room to invest more in acquisition. When that ratio drops below 3 to 1, the problem is rarely the price of advertising, it is how long people stay.
Assumptions and limits
- It assumes a constant dropout rate. In practice the risk is highest in the first two months and falls after that.
- It does not discount the time value of money. For long stays, the real figure is somewhat lower than the calculated one.
- It takes the gross fee unless you have already subtracted fees. Always compare against an acquisition cost measured the same way.
