Want to calculate the customer lifetime value for your business? Just enter the figures for a given month below:
What does customer lifetime value mean?
Customer Lifetime value means the return you get from a customer over the course of the time they’re in a relationship with your company or business. This generally refers to businesses who receive recurring payments from customers or who get repeat customers.
Why is your customer lifetime value important?
Understanding the lifetime value of a customer helps businesses determine how much to spend on marketing and resources, how profitable their product/s are, and can help shape the direction of their business.
This metric is important to businesses who have subscription based services. This could include large brands such as Netflix and Spotify, or even solopreneurs that operate membership sites.
Calculating your customer lifetime value assists you with determining other key metrics, such as your customer acquisition cost. Your customer acquisition cost (CAC) is how much it costs your business to acquire a customer. If this figure is higher than your customer lifetime value, this means that you’re spending more acquiring the customer, then you get back in return from them.
For example, if your customer lifetime value is $50 per customer, however it costs you $50 to acquire that customer, then your business is effectively losing money and you should reconsider your lead generation strategy.
How you can improve your LTV
Once you’ve identified what your current customer lifetime value is, to increase it you’ll need to assess why the ‘churn’ is happening.
For example, if a customer only spends 6 months with your service, you’ll need to understand why they only stay for this amount of time. The best way to achieve this is by having a short survey when a customer decides to cancel their subscription. This may give you indicators of areas of your service you may need to improve.
Another way to increase your customers lifetime value is change the packages for your service, for example go from monthly billing, to yearly billing and offer a discount (for incentive purposes). This way you double your retention time with little effort.
If your business doesn’t offer subscription based services, an effective method of increasing your lifetime value is to create add-ons, upsells or bundles for the customers to increase their order value.
How to calculate your LTV
Average order value x Number of repeat sales x retention time = LTV
£20 x 12 sales x 1 years = £240 LTV