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Lifetime Value (LTV)

Lower is better


How is Lifetime Value (LTV) calculated?

Lifetime Value (LTV) formula

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.

How you can increase your LTV:

  • Provide strong customer service and support. If customers have any problems, they'll be less likely to switch if you're there on the other end of a chat or email.
  • Offer discounts for purchasing annual contracts or bulk purchases. When customers pay you upfront, you'll immediately be able to use the money back into making the product better for them.
  • Offer a referral or affiliate program. This will help create viral growth by rewarding customers who bring in more customers and giving them an incentive to stay with you.

What tools can I use to increase my customer lifetime value?

  • Many popular analytics packages, like Google Analytics or Mixpanel, will give you insights into your customers' behavior and help you identify ways to improve.
  • Leverage your user research teams to ensure you're delivering value to your existing customers. If you discover that users want more features in addition to your existing offering, you may be able to build upgrades or add-ons to increase your ARPU.

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.

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