Customer Lifetime Value: The Key to a Lasting Relationship
LTV tells you exactly what you need to know about how well your product is resonating with your customers, what you’re doing well, and which areas need improvement.
It’s ready. You’ve vetted it thoroughly with beta tests, prototypes, soft launches, and surveys. You’ve perfected your sales pitch. Your messaging and marketing campaigns are striking a chord. And your target audience is expressing interest. After all those late nights, it looks like the labor of love that is your product has a shot at making it in the world. It’s a glorious feeling. And you want to keep that feeling going. But how?
How to Keep the Magic Alive
Every customer who buys your product represents the beginning of a potentially beautiful new relationship—and as with any budding romance, you’re probably wondering “How much does this person like me (i.e. my product or service)?” “Will we burn hot and fast or long and slow?” “Can we grow together?” “Will their friends and family like me?” Luckily, there’s a way to gauge which customer relationships deserve to be nurtured and which were doomed before they began—no awkward conversations or gossip-brunches required. It’s called customer lifetime value.
What Is Customer Lifetime Value?
Customer lifetime value (LTV) is the average amount of money you expect to receive from a customer over the life of their relationship with you. LTV tells you exactly what you need to know about how well your product is resonating with your customers, what you’re doing well, and which areas need improvement.
How Do You Calculate Customer Lifetime Value?
Interested in learning how to calculate customer lifetime value? Or, more specifically, how do you determine the value of your customers? The most basic LTV calculation is achieved by taking your average revenue per user per year (ARPU), multiplying it by gross margin (your net sales revenue minus cost of goods sold), and dividing that by your churn rate (the percentage of customers that stopped using your product or service during the period in question). The longer a customer continues to buy your product or service, the greater their lifetime value becomes.
Why Does Customer Lifetime Value Matter?
Customer lifetime value tells you how much revenue you can expect a customer to generate over the course of your relationship together, which helps you understand how much you can spend to acquire new customers, how long it will take you to break even, and if customer relationships are profitable in the long term. LTV also helps you identify and track where and when your customers churn, helping you build retention strategies.
Here’s Why Tracking LTV Is Such a Beast
Tracking LTV hurts. It scars. It wounds and marks... Okay, we’re being a tad dramatic here. But the truth is: Tracking LTV is hard. Obtaining metrics to define something as ethereal as customer sentiment requires a lot of data. You’ll need to track when your customer purchased your product, the length and price of their contract, and related upsells, downgrades, and renewals. You’ll also want to filter it all by vintage and product line, so you can see how seasons, time periods, and offering types impact your customer relationships.
That’s a lot of data, and it probably lives deep within your CRM in less-than-accessible places and less-than-intuitive formats. It takes a good deal of human power to pull, scrub, input, and analyze all that deep-down data. You’ll also want to overlay it on your customer acquisition cost (CAC) so you can really start optimizing your business for long-term sustainable growth.
The obvious issue here is that there’s never been a tool that can produce the LTV metric for you—it’s typically required a maddening amount of manual analysis and number-crunching in spreadsheets, and the process can be time-intensive and error-prone.
But don’t worry. There’s hope …
How to Calculate Lifetime Value (Without Taking Years Off Your Life)
Mosaic connects to your CRM and automatically collects, normalizes, and calculates your customer LTV. It even groups customers by cohort and product line, so you can track the effectiveness of specific sales and marketing strategies and pin down the most profitable customer journeys and milestones, all in real-time. With Mosaic it's easy to overlay CAC alongside your LTV calculation.
The Bottom Line
Having a solid (and current) understanding of your LTV can help your business identify successful strategies for customer onboarding and retention, as well as common customer stumbling blocks, which helps you plan for smart, sustainable growth. Real-time LTV insight can also help you see when a customer relationship is getting a bit rocky, so you can jump in with flowers or chocolates, or better yet, an excellent customer success plan.