Eliminating the unknown and replacing it with data

Understanding LTV (lifetime value)

Ok, so we are going further with our metrics. There is nothing out there that can stop us. LTV, short for lifetime value, is exactly what you think it is. By means of LTV, we are actually measuring the lifetime value of our product, more specifically, the predicted amount of time a customer will spend using your product throughout your entire relationship. LTV really makes you think about how to create long-term relationships with your customers. We’re pretty sure you are aware of the many advantages brought by a long-term customer relationship. Just think of the feedback you will receive, the many ways you could improve your service or product using info coming from the customer’s mouth. Long-term relationships are goldmines and you need to start digging.

Pick up your shovel and to strike gold from your very first try, remember this formula:

LTV= ( ARPU x Profit per user) / CHURN RATE

Simple, right?

And as a friendly tip, when calculating the average profit per user, make sure you subtract the cost of the goods sold, account management and customer service from your ARPU. And since we are feeling extra generous today, we want to tell you something else. When trying to calculate LTV, you need to really consider the number of users from which you can collect data. To have a conclusive LTV you can, later on, use in your strategies and business analyses, make sure you are collecting data for a sufficient number of users. But what is sufficient, right? We hear you!

So, here are the limits you need to address. If your business has:

  • Less than 100 users, your sample size for calculating LTV needs to be at least 50% – however, in this situation, you could consider all your users.
  • 1,000 to 10,000 users, your sample size needs to be at least 10% of user data.
  • Over 1.000.000 users, your sample size needs to be at least 1% of your entire user number.

What do you do with LTV?

Well, now that we’ve settled upon the method to calculate LTV, the question that hangs in trees is what exactly one can do with it. After all, you did complicate your existence a bit trying to gather all the data necessary to calculate it. So, what’s next? Well, customer lifetime value actually displays the profit your customer brings to and the total value of your business. Because, after all, we all are our customers. They are the reflection of the true value of our business. It’s not the cost the product, but the value of our customers. That’s what you need to remember.

You need to introduce LTV to your strategies. Include LTV in your strategies, you can start fine-tuning them based on the value you have just identified. Quite frankly, when learning your customer LTV you could consider focusing on feeding your relationship with your customer. Setting your priorities in order based on numbers rather than feelings is always the right approach in business.

And we are just going to say it again. Nurturing customer relationships always pays off, but always. It’s a rule set in stone. The great thing about it is that it pays off in so many ways. For instance, just before discovering LTV you might have been focused on constantly acquiring new customers, accepting all the risks and downfalls involved. And while acquiring customers is part of the everyday existence of any business, or it should be, in case you intend to survive in this market, know that there is life beyond it. Customer retention is just as important, especially once you discover that your customer LTV is looking good. Feeding already existing relationships with your customers will give your business a steady financial flow, which you should rejoice about. Constant revenue never hurt anyone, did it?