e’ve all read the personal finance advice that cutting out our daily coffee from the shop will pave the road toward home ownership. But those coffee shops cringe at suggestions like that because it threatens their customer lifetime value.
Additionally, brands like Apple and Google attempt to keep existing customers attracted to their brands by offering refreshed devices each year, even if they are superficial. The “best phone yet” mentality plays on our need for the latest and greatest, creating continued revenue for those organizations.
With all this effort surrounding customer lifetime value, marketers and their leadership may question this deceptively simple calculation. These questions range from the basic “What is customer lifetime value?” to putting this metric into action with questions like “What steps can I take to improve LTV?”.
Unfortunately, customer lifetime value is a bit more complicated than it appears. However, we put together this comprehensive guide on what customer lifetime value is, why it’s essential to your organization, and the best practices you need to implement for the most significant positive impact.
What Is Customer Lifetime Value (LTV)?
Customer lifetime value is how much revenue the average customer will bring to your company throughout their lifetime of doing business with you. That lifetime could be several months, like in SaaS businesses, or decades for single customers in restaurants or the aforementioned coffee shops.
Marketers refer to customer lifetime value using acronyms, including:
Combined with other metrics, like customer acquisition cost (CAC) and retention or churn rates, LTV can show businesses the value various customer segments bring. Likewise, the lifetime value of a customer can help drive product development and guide marketing efforts.
Why Calculate Customer LTV?
Okay, so now that we’ve covered what customer LTV is, let’s explore why including it in your calculations is crucial for success. Whether you’re a start-up or an established enterprise, the LTV metric provides marketing insight in various ways, bringing benefits such as:
- Allowing you to understand the estimated lifetime value of new customers.
- Enhancing data-driven decision-making, enabling strategic deployment of resources.
- Identifying the business’ most valuable customers and their spending habits.
- Improving customer retention rate by adapting to meet their needs and wants.
- Aiding financial planning and predictive modeling for future revenue.
- Helping uncover high-performing marketing channels and those with poor CAC ratios.
Discovering trends in your LTV data can tell you a lot about what’s happening in your business. You could have customer support in need of, well, support. Or maybe marketers are spending too much on social media campaigns when email marketing drives purchase frequency.
Calculating Customer LTV: The Basics
Though it appears deceptively simple, some nuance goes into these calculations. Peeling away the layers of the fundamental equation reveals some additional metrics required to tell a complete picture.
The most straightforward LTV formula is:
- LTV = ARPU x customer lifetime
In this equation, customer lifetime is in either months or years, and ARPU stands for average revenue per user. It comes from another equation, which is as follows:
- ARPU = ASP / Total users
ASP is your average selling price, though you can modify the equation based on your business model. For example, your ARPU formula can be average order value/total number of customers or average purchase price/number of customers.
Another customer lifetime value calculation uses customer churn, as in the following formula:
- LTV = APRU / user churn
In this equation, a high churn rate equals a low LTV, meaning losing customers harms your CLTV and your cash flow. Similarly, a high APRU, ASP, or long average customer lifespans leads to high LTV.
However, calculating LTV goes beyond these simple equations when adjusting for churn and cohort size. For example, apply a discount rate to receive a more reserved result or to account for a small sample size.
As we mentioned, when you combine these customer lifetime value formulas with CAC ratios, you can gain insight into how long it takes, on average, to recuperate the costs associated with obtaining new customers. Understanding these ratios highlights the importance of loyal customers.
And brand loyalty comes from high customer satisfaction—another crucial set of metrics. For instance, brands with high net promoter scores (NPS) are more likely to have loyal customers and higher LTVs.
Best Practices for Customer LTV Calculation
So now you know about LTV and the various formulas and associated metrics that contribute to the results you calculate. However, there are a few best practices to ensure you have the most accurate picture of your LTV. These practices include:
- Ensure the quality of data – An accurate picture is only possible with high-quality data. A partner like HYROS can help you with technology and integrations to help you ensure you calculate LTV with only the best possible data.
- Foster collaboration – Competition can be fierce, especially at emerging SaaS companies, startups, and e-commerce organizations. However, clear communication and productive collaboration lead to easier LTV calculations.
- Optimize your calculation methods – Technology can help ensure you don’t make mistakes in your calculations, provide up-to-date data, and identify trends. Plus, with HYROS, you gain access to AI and machine learning to help uncover easy-to-miss trends.
While these tips will help you calculate LTV, they will only go so far in improving the results you get. Luckily, a few best practices can help you boost LTV in your organization.
Implement these practices in your organization to boost LTV:
- Simplify the onboarding process – Start each customer relationship off right by making it as easy as possible to get up to speed with your brand. Reduce customer friction and require the least effort on their part while ensuring you treat their private data with care.
- Increase sales – While it sounds rather basic, the idea goes beyond initial sales by implementing upselling, cross-selling, and add-on sale opportunities. These can be complimentary products or services that help your customer get more value from your business.
- Improve the customer experience – Build customer loyalty by investing in your customer support team. Train support agents to be more effective, implement chatbots, and provide timely support for each customer.
A few actions can make a world of difference in boosting your LTV results. Likewise, proper investment in customer support and technology can make it easier to track KPIs and make data-backed decisions on where to invest marketing resources.
Streamline Your Customer LTV Calculations With HYROS
There’s no doubt that customer lifetime value is an essential metric to track in your organization, especially since it can provide insights into marketing activities, the efficiency of sales practices, and what the customer wants or needs.
Although it appears to be a simple calculation on the surface, there is much more to it. You will need complementary metrics, like APRU, MRR, and churn, to get your LTV results. Additionally, you will want to pair it with other KPIs, such as CAC, to get the whole picture.
Make your life easier by investing in a platform that tracks and calculates LTV and other crucial advertising and marketing metrics. HYROS is your solution to time-consuming calculations and inaccurate data. Schedule a call to see if we would be an ideal partner for your organization!