Today I'll walk you through how to use a geometric probability distribution to explain why
1/Churn Rate is an acceptable method for calculating Average Customer Lifetime.
Remember, Average Customer Lifetime is 1-of-2 inputs used to calculate Customer Lifetime Value:
CLTV = (Average Customer Lifetime) x (Average Revenue per Account)
Key Takeaways:
1/Churn Rate is a perfectly acceptable method for calculating Average Customer Lifetime
Calculating the average customer lifetime using historical data, only, will artificially reduce your average customer lifetime because it excludes the long-tail associated with customer who stay with you for years. This long-tail is calculated using probability and helps increase the average customer lifetime
Reducing average customer lifetime also reduces CLTV
Reducing CLTV reduces LTV:CAC
Both CLTV and LTV:CAC are growth metrics used by venture capitalists and investors to assess the overall value of your SaaS business