A company has a customer retention rate of 85%. What is the average customer lifetime?

How to answer

Average customer lifetime = 1 / (1 - Retention Rate) = 1 / (1 - 0.85) = 1 / 0.15 = 6.67 years. This formula assumes a constant churn rate of 15% per period. So the average customer stays for about 6.7 years. If the annual revenue per customer is $1,200, then LTV = $1,200 x 6.67 = $8,000 (undiscounted). With a 10% discount rate, the discounted LTV = $1,200 / (0.15 + 0.10) = $1,200 / 0.25 = $4,800. Improving retention from 85% to 90% extends lifetime to 10 years and increases discounted LTV to $1,200 / (0.10 + 0.10) = $6,000—a 25% increase in customer value from a 5pp retention improvement.

Key idea: Lifetime = 1 / churn rate; for discounted LTV, add discount rate to churn rate in the denominator.