Customer lifetime value is among the trickiest SaaS metrics as tracking and analyzing it is quite challenging. Moreover, once you track it, you don’t know what to do with it. Sometimes, you may not even know whether your LTV is good. Today, we will help you understand these complex metrics by explaining everything about them. In this post, we will try to answer the following questions.
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What is the customer’s lifetime value?
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What’s involved in LTV analysis?
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What insight do you get from this analysis?
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How to Improve it?
Let’s move forward without further ado.
What is the customer’s lifetime value?
LTV is the total revenue you can expect from a single customer throughout the relationship. The period a customer stays with your business as a paid user is called a lifetime. It’s a crucial metric that helps you understand the long-term benefits of investing in acquiring and retaining subscribers.
How is LTV Calculated?
Calculating LTV for a single customer is quite simple as you only have to consider the total amount you charge from them throughout the relationship. However, it’s not practical for a running business as you will have multiple customers. You need to calculate it using a lifetime formula. This formula is:
LTV = ARPU (average revenue per user) × Customer Lifetime
You can calculate it using the churn rate as well. The formula will be:
LTV = ARPU / User Churn
It means you have to track two additional metrics to calculate customer lifetime value for a running business. The whole process can be overwhelming, especially when you are tracking metrics manually. Don’t worry! You can use Baremetrics to track and analyze this metric. It’s a reliable tool that can help you track more than 26 SaaS metrics.
What’s Involved in LTV Analysis?
Without analysis, LTV is just a number. You need to analyze it to get useful insights and take proactive steps to grow your business. You can do so by following a few simple steps.
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First of all, you need to track the LTV for your business and gather data on acquisition cost, churn rate, etc.
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After that, you have to make cohorts based on demographics, purchase behavior, and other similar characteristics.
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List cohorts in a separate sheet and find trends to notice similarities among high-value customers.
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Now, compare LTV with customer acquisition cost to check the performance of your marketing team.
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Share the information you get from this analysis with relevant teams to improve the overall performance of your business.
You can analyze this metric by using Baremetrics. It will help you compare your LTV with industrial benchmarks to check if it’s good or not.
What Insights You Get from LTV Analysis?
Tracking and analyzing customer lifetime value will provide useful insights that will help you make informed decisions and grow your business. It provides information about:
Customer Profitability
It reveals which customer segments are the most profitable in the long run. It helps to understand the total revenue you are likely to generate from customers in a lifetime. You can identify which segments are worth investing more in. This insight allows you to focus on high-value customers. It ensures that you will get the maximum return on investment.
Marketing Efficiency
You can compare LTV to customer acquisition cost (CAC) to assess the efficiency of your marketing efforts. This comparison tells you whether you are bringing in customers whose lifetime value justifies the cost of acquiring them. A high LTV/CAC ratio indicates that your marketing is effective and customers you’re acquiring are profitable. If this ratio is less than 3, you need to focus on developing more effective marketing strategies.
Retention Strategies
This analysis highlights the importance of customer retention by showing how long-term relationships contribute to overall profitability. The longer a customer stays with your business, the higher their lifetime value will be. It enables you to check if your current strategies are retaining high-value customers. Moreover, this insight helps you develop strategies to improve customer loyalty which will ultimately improve LTV.
Revenue Forecasting
Understanding your customers’ LTV leads to more accurate revenue forecasting. It’ll help you project the future value of your existing customers. As a result, you can better estimate future revenue streams and plan accordingly. This insight is particularly useful for financial planning, resource allocation, and setting realistic growth targets. It also helps in maintaining a steady cash flow to run business operations smoothly.
How to Improve Customer Lifetime Value?
LTV is directly linked to the profitability of your business. Therefore, you should focus on improving it. The following are some proven strategies to boost it.
Enhance Customer Experience: You should focus on delivering exceptional service to improve customer experience. This includes responsive customer support, easy-to-navigate websites, and a seamless purchasing process. Customers who have positive experiences will return and recommend your business which will extend their lifetime value.
Implement Loyalty Programs: Rewarding customers for repeat purchases and long-term engagement can boost their loyalty. You can offer exclusive deals or early access to new products to make them feel special. It will motivate them to stay loyal, which will ultimately boost LTV and profitability.
Personalize Marketing Efforts: You can use customer data to run targeted marketing campaigns. It involves sending personalized emails with product recommendations or content that accommodates their specific needs. You can notice similarities among high-value customers and run campaigns accordingly.
Upsell and Cross-Sell: Training your sales and customer service teams to effectively upsell or cross-sell products can boost LTV. For example, if a customer buys one’s product, you can offer them a discount on relevant products to make them spend more. This will not only boost LTV but also strengthen customer relationships.
Baremetrics – Your Go-to Option to track and Analyze LTV
Baremetrics is a reliable tool with a user-friendly interface. You can use it to track and analyze LTV and get useful insights to grow your business. Apart from that, you can leverage it to track all crucial SaaS metrics.
