Why Investors Should Favor Companies with High Customer Lifetime Value (CLV)

Oct 13, 20245 min read

Updated: Jan 9

Table of Contents

What is Customer Lifetime Value?
Good Examples: Companies with High CLV
Bad Examples: Companies with Lower CLV
Correlation between Switching Costs & CLV
Where & How to find Companies' CLV ratings?
1. Analysing Net Retention Rate (NRR) & Renewal Rate figures
2. Using AI Chatbots

Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.

KEYPOINTS

High CLV Drives Sustainable Growth: Companies with high Customer Lifetime Value (CLV) tend to enjoy more predictable revenue and long-term growth, making them attractive to investors.
Switching Costs Boost CLV: Businesses that create high switching costs, like Apple and Fortinet, lock in customers for the long term, enhancing their CLV and securing a competitive edge.
Research Tools for CLV Analysis: Utilize AI chatbots and other free resources to assess companies' CLV ratings and make informed investment decisions aligned with your financial goals.

What is Customer Lifetime Value?

When evaluating a company’s near to medium-term growth potential, one key metric that stands out is Customer Lifetime Value (CLV). CLV represents the total revenue a company can expect from a single customer throughout their relationship. Companies with high CLV tend to have more predictable revenue streams and stronger long-term growth prospects, making them attractive to investors.

Good Examples: Companies with High CLV

B2C Companies:

Spotify and Apple are prime examples of B2C companies with high CLV.
Spotify’s subscription model keeps users engaged for years, with continuous revenue from monthly payments.
Similarly, Apple’s ecosystem locks customers into long-term relationships through products and services, like iPhones, iPads, and Apple Music, driving repeat purchases and upgrades.

B2C Companies:

In the B2B space, Axon and Fortinet excel with their high CLV.
Axon’s contracts with law enforcement agencies typically last for years, including ongoing revenue from hardware, software, and cloud services.
Fortinet, a cybersecurity leader, benefits from long-term customer relationships due to the critical nature of its services, offering businesses security solutions that require constant updates and renewals.

Bad Examples: Companies with Lower CLV

Not all companies enjoy the benefit of high CLV. For instance, Hasbro and Ausnutria Dairy cater to customers during specific life stages. Hasbro’s toys are largely purchased by parents for their young children, but as children grow older, they no longer need these products. Similarly, Ausnutria Dairy's products, like baby formula, are only relevant to parents for a limited period.

Correlation between Switching Costs & CLV

A key factor that often correlates with high CLV is switching costs, a form of economic moat that makes it difficult for customers to leave a company’s product or service. For example, once businesses invest in Fortinet’s cybersecurity infrastructure, switching to another provider could result in significant time, effort, and risk. Similarly, Apple users often find it inconvenient to switch away from its ecosystem, thanks to seamless integration across its devices and services. High switching costs protect customer retention and ensure long-term revenue generation, enhancing the company’s CLV.

Where & How to find Companies' CLV ratings?

i) Analysing Net Retention Rate (NRR) & Renewal Rate figures

While directly accessing a company's CLV figures might be challenging, valuable insights can be gleaned from metrics like Dollar-Based Net Retention Rate (NDR) and Renewal Rate, which may be available under the "Metrics" tab on financial websites like Stockanalysis.com.

Dollar-Based Net Retention Rate (NDR): This metric measures the growth of a company's recurring revenue from existing customers over a specific period. An NDR consistently above 100% indicates that the company is successfully expanding its revenue base from its customer pool, signifying a positive CLV trend.
Renewal Rate: The Renewal Rate reflects the percentage of customers who choose to renew their subscriptions or contracts at the end of a term. High renewal rates suggest strong customer satisfaction and a willingness to continue using the company's products or services, implying a potentially high CLV.

Case Studies: Semrush and ServiceNow

Let's analyze how these metrics can be applied:

Semrush: If Stockanalysis.com reveals that Semrush boasts a consistently high Dollar-Based Net Retention Rate (NDR) above 100%, it suggests that existing customers are spending more over time. This could be due to upselling or expanding their usage of Semrush's SEO and marketing tools.

ServiceNow: A high Renewal Rate for ServiceNow on Stockanalysis.com would indicate that customers are finding value in its cloud-based IT service management platform and are likely to remain long-term subscribers, contributing to potentially high CLV.

ii) Using AI Chatbots

Use AI chatbots which are able to craw the web for updated information such as Gemini & Copilot with a prompt like:

I am a long-term investor, who favors companies with high Customer Lifetime Value

Do you know if Fortinet has that? and how would you rate it on a scale out of 10? (10 being the highest), please provide some reasons for your rating

You should get a response like

This should serve as a good start for your to understand where the company stands, and you should definitely further your research with understanding more about the company's range of products/ services and their target customers to further build up your comprehension and come up with your own judgement for the company's CLV's score. You can find out more about the companies' products and services on their websites, stores and respective investor relation materials (investor presentations, shareholder letters etc).

Conclusion

In summary, companies with high Customer Lifetime Value (CLV) tend to have stronger long-term growth potential due to their ability to retain customers and generate recurring revenue. Businesses like Spotify, Apple, Axon, and Fortinet demonstrate how high CLV, supported by switching costs, can create a sustainable competitive advantage. As an investor, prioritizing companies with high CLV can lead to more predictable returns and long-term portfolio success. Be sure to research each company’s CLV thoroughly before making investment decisions to better align with your financial goals.