Customer Lifetime Value (CLV, or LTV) is by far the most important metric you can track for your business.
Knowing your customer’s lifetime value can guide your marketing, sales, customer support and product decisions. I’ll explain why.
First, If you are not familiar with the term – CLV (Customer Lifetime Value) or Customer LTV is an estimation of how much revenue a user will generate for your product before he churns.
How knowing your CLV can impact your business?
Being aware of how much a user is going to pay you once he is acquired can help you fine tune different aspects of your business.
I’ll give an over simplistic example just to make it easy to understand.
Let’s say that you have a SaaS product that costs $5 a month. Acquiring a new user cost you $10.
Assuming the $10 CAC cost is reasonable in your industry and you’ve optimized your funnels and campaigns – how would you know if paying double per user is worth it?
If your user’s LTV is 24 months, then you know that for every $10 you pay to acquire a user, it will take you 2 months to break even, but eventually, you will make $120 – that means that the acquisition cost is worth it.
The lifetime value will determine how much money you should spend on acquiring different types of customers. Customer Profitability (CP) measures the past and CLV measures the future.
If you want to determine your company’s marketing budget and cost of acquisition, you must first understand how to calculate Customer LTV.
Again, this is a very simplistic example, but you get the point.
Knowing a user will pay you $120 before churning can lead to optimizing different aspects of your business.
You can increase prices,determine the budget for marketing and sales, focus on support, or any other aspect that you believe will help you increase LTV.
With this calculation, you are able to determine the maximum acquisition cost for a new customer. If you spend more than the average LTV to acquire new customers over the course of an average customer lifespan, it is very probable that your company will be losing money.
Let’s get serious about Calculating LTV:
I’m not going to focus so much on how to calculate your LTV in this post – I’d rather lay out some ways in which you can increase it. But for you to make the most out of this post – you first need to learn how to calculate your product’s LTV.
Like any calculated time-related metric, there are different methods that different product managers and customer success managers use to calculate CLV.
You can use tools like RJMetrics calculator but you can also use more accurate and in-depth formulas.
Conversion XL wrote one of the best, in-depth posts on calculating LTV, so you should check it out.
Kissmetrics also posted a great infographic on the subject (though more suitable for Ecommerce, the logic is the same)
If you’re not keen on infographics – here’s a breakdown of how Kissmetrics suggests you calculate CLV.
To calculate CLV, you must follow these steps:
1. Find the average of the following variables across 5 customers:
- Customer Expenditures Per Visit (s)
- Number of Visits Per Week (c)
2. Multiply (s) x (c) = Average Customer Value Per Week (a)
3. Consider the Following Constants:
- Average Customer Lifespan (t): how long someone remains a customer
- Customer Retention Rate (r): The percentage of customers who repurchase over a given period of time when compared to an equal period of time.
- Profit Margin Per Customer (p)
- The Rate of Discount (i): interest rate used in discounted cash flow analysis to determine the present value of future cash flows.
- Average Gross Margin Per Customer Lifespan (m): how much profit each customer provides during their lifespan.
4. Now you can use 3 different equations to calculate the LTV:
- SIMPLE: 52 (a) x (t)
- CUSTOM: t (52 x s x c x p)
- TRADITIONAL: m (r/1+ i – r)
- Get the average out of the three results you got from the equations above to get the Average LTV.
6 Strategies to help increase your Customer’s LTV
Even if you don’t want to dive deep into unraveling the mysteries of your LTV and profitability per user, you know that increasing the lifespan of your users is a good thing, right?
I want to share with you 6 strategies smart SaaS companies use to keep their users around for longer periods of time.
1. Invest in Customers that are above average
It is good to use segmentation for your customer acquisition efforts by calculating LTV for different kinds of customers. Calculate the LTV for “regular customers” and the LTV for above average customers.
First, you must identify these groups of customers and define who the customers with the highest LTV are. They will not always be the ones subscribed under the most expensive plan. Analyze your customer data to look at the right segment of customers and invest in them.
The acquisition cost for the customers above average will probably be higher than that of a regular customer. However, it will be more profitable in the long run and it will have a lasting impact.
A great way to invest in good customers is by upgrading those who are engaging with your brand and have been loyal on a daily basis. Follow this niche and its patterns to provide an amazing user experience. You can try offering premium service through landing pages, blog posts, paid ads – all targeting this audience. Results will maximize retention and boost your brand’s credibility through valuable referrals.
By the time you start seeing actual results, the acquisition cost will feel diminutive compared to the returns.
2. Listen to your customers
If you want to increase customer lifetime value and revenue, you must listen to what your customers are telling you. If you take their advice, you will shift your company’s techniques towards the right direction.
Making constant improvements based on analytics and numbers you get from your data sure is important. But if you are making these changes to keep your customers loyal to your company, there is nothing more precise than finding out exactly what they’re feeling/doing as they’re using your product.
There are various ways to find out what it is that they are looking for, what they are missing or what they expect from upcoming features of your service.
- Hire a Customer Success manager to deliver a proactive customer support. Make sure you reach out to your users before they contact you for help. When they visit your website, chat with them and let them know you are there for them if they have any questions. You can get some inspiration for CSM best practices here.
- You can engage with them through the onboarding process by sending automated emails or pop-up questions regarding their satisfaction level with your service. Your onboarding is actually one of the most crucial elements to building loyalty from your users – so you’ll have to focus on how to improve it all the time.
- Take their advice by sending them surveys and creating polls through social media, your own blog or emails. This way, they can let you know what they think of new features you are planning to add or old features you are thinking of improving.
It’s not only about you getting valuable feedback. You should also make an extra effort to make them feel valuable by engaging with them.
If a user replies to your survey, show them you appreciate it. If you added a new feature based on their requests, announce it on social media. If they contacted you through your website’s chat, reply right away. And so on.
Bottom line: make your users feel noticed and appreciated.
3. Create Engagement Points (Even for Inactive Accounts)
Thinking about your users as “users” is the first mistake you can make when trying to optimize LTV. They are not users, but individuals – and they should be treated that way.
That’s why engaging your customers through a personalized experience is so important.
Personalization helps users achieve exactly what they want and have the right expectations from the service you provide.
Earlier in the post, we discussed segmenting your customers to calculate acquisition efforts. But segmentation doesn’t stop on acquisition – you should continue to segment your customers through the entire customer lifecycle.
This way, you can ensure a personal customer experience from the first touchpoint and until they become loyal users.
You can have influence over your ideal niche by targeting through multichannel marketing. Use precise messages that will trigger your niche’s interests. Engage with them in places they usually visit and make them want to take a look at what you can offer for them.
Don’t focus entirely on acquiring new customers! Remember that it’s also important to re-engage with existing customers.
Segment the customers that have a high risk of leaving and study their behavioral patterns.
Use video session recordings to watch how they engage with your service, how they use your product, where they are getting frustrated, and optimize accordingly.
As your features have been optimized, notify your these users and provide free webinars for them to re-engage and get what they originally came for.
4. Create competitive advantage throughout your product
Give your customers a better experience than your competitors.
Focus on providing quality in every step of the way, every feature, service, interaction, etc.
Do some research on what your competitors are doing and make sure you do more. Add extra efforts through blogging, social media, customer service, resources, rewarding your customers and making sure that they gain value.
I’m not talking about personalization. It is also about efficiency and providing a smooth experience. Don’t just ask yourself what they came for but also how can you make their life easier?
- Faster subscription forms
- Automatic repurchase methods
These are small details that will make a huge difference when it comes to what your users think of your service. This kind of changes will make them come back to you intuitively.
If you make them wait, or if you wait until they reach out to you when they are having trouble, they will most probably leave.
Nowadays, there are probably many companies providing the same service as you. The difference is the experience you can create for your customers. Make it easy, affordable and engaging so they will have a reason to stick to you.
5. Create an Email strategy based on user lifecycle
Your product might be great, but you’re probably not always on your users top of mind.
Sure, most of the time users churn for simply not achieving what they expected to achieve using your product, but sometimes it’s about you failing to create a habit of using your product.
In Nir Eyal’s book – “Hooked”, he describes the first step for building a habit-forming product as establishing a “trigger” that will get users to come back to your product. He specifies two types of triggers – internal and external.
Internal triggers refer to your inner motivations to using a product (I’m bored – >I’ll open Instagram)
External triggers refer to cues we get from the world around us. For example – seeing the Instagram icon on your home screen or getting a notification that someone liked your picture.
Emails are another form of external triggers that work exceptionally well for B2B and SaaS companies.
By creating different emails that accompany your user’s lifecycle you can set an automatic flow of reminders, reminding your users to come back to your product.
You can use:
- Welcome emails
- Promotional emails
- Transactional emails
- Behavioral emails
- Content marketing related emails
- Timely reports
Remember, each email should provide real value for your users. There’s a fine line between higher retention rates and spamming.
6. Remind your customers that Quality is your priority
For new visitors, this will create a great first impression and make them feel comfortable in exploring further features, ultimately increasing the possibility for them to sign up. Provide a quality subscription by offering free trials or webinars and support along the way.
When we discuss existing customers, the longer they’ve been with you, the better they know why they’re staying with you.
Not only do you need to invest in these loyal customers by upgrading and improving their experience, but it is completely unacceptable to decrease the quality level you provide them in any step of the way. Why? Because they will notice immediately that something is off. Retention rate would be at risk, and you’ll be losing the customers that have the highest LTV.
A never-ending optimization process will make them come back and spend more money on your service. Responsiveness, patience and good attitude towards your customers is also a part of delivering a high-quality experience. Altogether, it becomes professionalism – and this is what a customer expects in order to feel valued.
The ultimate hack for increasing your user’s LTV is providing them with real value and helping them be successful at achieving their goal using your product.
Not caring about your users is the 1# cause for churn. All these tactics and strategies only aim to emphasize the many ways you can nurture your users and delight them even after they convert.
Don’t make the mistake of thinking that marketing your product or services ends with them converting into paying users. This is actually only the start of making your product profitable.
What strategy are you using to retain users for longer periods of time? Tell us in the comments.