What is Customer Lifetime Value (LTV)
An important profit metric
Customer Life Time Revenue (LTV) and Customer Life Time Value (LTV) are two of the most important metrics you have. Essentially they work out how much revenue or profit a customer will make you on average from the day they sign up until the day they leave.
LTV vs LTR
- Life Time Revenue is the total revenue that the customer will bring in over their lifetime.
- Life Time Value is similar to LTR but takes into account your costs of providing the service.
In Upmind we focus on the Life Time Revenue metric. In this article, we also show you how to calculate your own Life Time Value figure.
Why are they important?
Knowing your LTV/LTR allows you to accurately budget a cost for acquiring a customer. For example, if your customer LTV is $500, then a customer acquisition cost of $200 would mean you make $300 from an average customer.
Working out LTR
It is easy to overcomplicate an LTR calculation. In a growing subscription business, the tendency is to say 'I do not know how long a customer will stay with me; most never leave because they love my product'. This may be true, but it is also irrelevant. LTR is a mathematical calculation and, though the data may get more accurate over time, you can extrapolate from as little as one day's data.
There are a couple of constituent calculations we need:
Churn Rate. This is the number of customers you lose over a year. We can take your number of customers at date 1, and work out how many are left a year later. Or we can do the same calculation over a month and multiply it by twelve, the same calculation over a week and multiply it by 52, and so on. If you lose twenty of your 100 customers in a year then your churn rate is 20%.
Average Revenue Per User (ARPU). This is the average spend per client over the year. We should not use annual recurring revenue (ARR) here as we need to include discounts. So the simplest way is to divide total cash in by the number of customers.
With the above two bits of data, we can work out the lifetime revenue of a customer. We simply divide ARPU by churn rate. If your ARPU is $100 and churn rate is 20%, then your lifetime customer revenue is $500.
Obviously, you are going to have some outliers: some customers who cancel immediately, and others who will stay loyal forever. What we are trying to work out here is an average.
LTR in Upmind
In Upmind, you can see your LTR under the
Insights and Reports section in your user dashboard.
Working out LTV
LTV is roughly the same calculation as LTR, but also factors in the costs of you providing a service. Because we do not know your costs, we do not show an automatic LTV. However, you can easily work it out yourself.
Rather than establishing individual costs per product, the simplest way is to work out your gross margin. You can ask your accountant to help you with this but in this example, we will use a typical gross margin of 40%.
You then need to take the Churn Rate and ARPU figures we provide in Upmind.
- LTV = (ARPU * Gross Margin) / Churn Rate
- LTV = ($100 x 40%) / 10%
- LTV = $400
In this case, the LTV is $400 and the business could spend up to $400 on customer acquisition before losing money.
Updated about 1 year ago