Customer Lifetime Value (LTV)

The last thing your subscription-based business needs is high customer churn because it costs a lot more to find new customers than it does to keep existing ones. Increasing customer lifetime value (LTV) decreases revenue churn, but what is LTV, and how do you calculate it?

What Is Customer Lifetime Value?

Customer lifetime value (LTV) is the total profit you expect to receive from your average customer over their lifetime with your business.

Hopefully, you’ll be able to keep the typical customer subscribed for a long time and can make more than one sale to them in the form of upgrades or additional services. LTV is the total profit you can expect to receive from all of those sales

Why Is LTV Important?

Knowing how much a customer is worth makes it easy to calculate how much you can spend to acquire that customer. If your LTV is higher than your competitor’s LTV, you’ll have a bigger budget and can outspend that competitor for retention programs, content marketing, and PPC ads.

You can use a help center, secondary onboarding, and surveys to improve your customer experience and LTV.

What a Healthy LTV Looks Like

Your business is strong if your LTV is at least three times as much as your customer acquisition cost (CAC). You can calculate CAC by dividing the total cost of sales and marketing by the number of customers acquired.

If your LTV is $180, the cost of getting your new customers shouldn’t exceed $60.

How To Calculate LTV

To keep everything simple, let’s assume:

  • You have a straightforward subscription model priced at $10 billed monthly without discounts, upsells, or cross-sells
  • Your average customer stays with you for three years
  • It costs you $5 per sale to create and maintain your product

To find your LTV, multiply $5 by 12 months by 3 years, which equals $180. Your LTV is $180. Notice that we used the subscription price minus the cost of production.

Common Pitfalls in LTV Analysis

While it’s easy to understand what LTV is, calculating it accurately can be difficult because of the many variables involved. You’ll need to combine past data and estimates regarding future customer activity for each item, like total contract value and average contract value. Some common errors are:

  • Using too long a time frame. Most good LTV predictions don’t go past five years, with the most practical time being two to three years. Longer requires calculating items like the cost of money. Also, it’s challenging to forecast CAC over more extended periods.
  • Using total revenue instead of profit. If you use total revenue, you’ll think you have far more for customer acquisition and retention than you do.

While LTV analysis is valuable, remember that it is based on many variables and assumes that the future will resemble the past.

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