Lifetime Value (LTV)
Lower is better
How is Lifetime Value (LTV) calculated?
Let's say your business charges $10 a month to use your product or service. A user that pays for your product for 6 months then cancels their subscription would have an LTV of $60. Now let's say your business has 100 customers. Each customer will find different levels of value in your product; some may stick around for two months, and others, two years. Additionally, you may have different pricing tiers. You may charge $10 for your lowest tier with a $50 tier that has more features.
Because of these variations, you'll need two more metrics to measure LTV accurately. Churn rate takes different customer lifespans into account, while average revenue per user (ARPU) accounts for variations in pricing options. To calculate LTV, take your ARPU and divide that by your churn rate.
What is Lifetime Value (LTV)?
Customer lifetime value (LTV) is the predicted amount that a customer will pay for your product or service until they cancel or stop using it. LTV is incredibly important for businesses with subscription-based pricing models since it focuses on long-term, repeatable income rather than individual transactions.
LTV often varies drastically based on the pricing of your product or service. Higher pricing tiers typically have customers with higher LTV. If a business is willing to pay you thousands of dollars, they're likely investing their resources into your product to get up and running. This investment creates a natural lock-in since the cost to switch to a competitor is also higher. Since customers at higher pricing tiers have already invested resources into your product, they typically stick around longer than customers who can easily switch or cancel with little negative impact.
Why is Lifetime Value (LTV) important?
Lifetime value is a great metric to focus on because it not only shows the culmination of revenue efforts across every vertical of your organization but also surfaces how loyal your customers are.
Start tracking your Lifetime Value (LTV)
Create a KPI for Lifetime Value (LTV) to monitor it over time and an OKR to track your impact against it in Commonality.
Average Revenue Per User (ARPU)
Monitor your monetization efforts and ensure that your paid offerings are delivering enough value.
Average Revenue Per Paying User (ARPPU)
Increase your revenue by ensuring that your paying customers are finding enough value in your product to pay higher costs.
Customer Acquisition Cost (CAC)
Ensure you're staying lean and scaling efficiently by measuring how much it costs to acquire a single customer.
Lifetime Value to Customer Acquisition Cost (LTV/CAC)
Measure this leading indicator of prediciting future growth, customer profitability, and the efficiency of your sales and marketing efforts.
Monthly Recurring Revenue (MRR)
Measure the amount that your customers or users consistently pay every month to use your product or service.
Net Promoter Score (NPS)
Measure the sentiment of your customers or users and track how likely they are to refer your product to others.