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Analyze your customer lifetime value

Use case

Track the average lifetime value of your customers.

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1. Understand the variables for calculating LTV.

  • Duration: how long the customer is expected to pay for your solution.
  • Value: how much money you receive from the customer.

 

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2. Determine which formula to use in calculating LTV, based on the intricacies of your pricing model.

The base formula is:

LTV = how much money you receive from the customer per month * how many months the customer is expected to pay for your solution 

However, you might have other factors to add in:

  • Discounts: whether to include lifetime and temporary discounts in the value calculation.
  • Price changes: how to allow for changes in your pricing over time.
  • Plan changes: if changes in plan type durations or compositions – for example, removing monthly plans and only offering annual – should be included.

CLV can also be affected by:

  • Purchase frequency: Increasing purchase frequency can increase CLV.
  • Average order value: Cross-sells and upsells can increase CLV.
  • Gross margin: Your gross margin can also affect CLV.

Analyzing what affects customer lifetime value can help you identify areas to improve this metric.

Every business has to decide how they want to handle each of these factors in their calculation. An example formula is:

LTV = ARPU per month * average tenure in months
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3. Create a spreadsheet to calculate your LTV over time, with months as columns and a row for each of your formula metrics.

For example:

Source: provided by author

As you compare months, it’s a good idea to take a holistic approach to your analysis. For example, if March is higher than April, you can cross-reference your promotional calendar, social media channels, or customer service logs to see if there was an issue in April that caused a drop.

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4. Fill in the spreadsheet and add your formula to the Customer Lifetime Value cells to automatically calculate the LTV.

This will help you to avoid making typing errors or calculation mistakes. For example, if your LTV formula is LTV = ARPU per month * average tenure in months, your spreadsheet formula for cell B4 might be:

= B2*B3
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5. Analyze your LTV over time, looking for trends and patterns.

Ask yourself questions like:

  • Is the LTV stable over time, declining or increasing?
  • Do I notice a particular month with a high or low LTV and why?
  • Do I need to further segment my LTV calculation by other dimensions, such as plan type or billing period?

Remember, CLV influences how much you can spend on customer acquisition. In turn, this data will drive your advertising budget.
 
You can also use this data to acquire higher-value customers, identify customer tiers that are driving the most profits, and find weak points in your marketing or operations that are causing churn. 

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Current Playbook:

Analyze your customer lifetime value

Sep 16, 2021

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