What is Customer Lifetime Value?
Customer lifetime value (CLV), sometimes referred to as lifetime value (CLTV).
This is the profit margin a company expects to earn over the entirety of its business relationship with the average customer.
This metric shows how much revenue a customer provides you while using your service.
It’s essential to know your average client LTV to run effective marketing campaigns.
The key is comparing LTV to customer acquisition cost (CAC). If a user provides more revenue than you spend to acquire him, you are earning money and should be looking into scaling your user acquisition to grow your business.
Usually, you have to pay for marketing upfront; let say you are running a CPA campaign.
But you collect revenue gradually when a client uses your service.
This diverse from business to business. Let’s take an example of Netflix, where Netflix charge it’s users on a monthly, semiannual, or even annual basis.
That’s why it’s also essential to look at LTV estimate over a set time period. What are your users’ six-month LTV, one-year LTV, or two-year LTV? Depending on the capital you have, you need to decide what time period is acceptable for you to break even and have a positive return on advertising spend.
Most of us think Calculating LTV is so complicated, whatever may be the type of business it is relatively simple.
How to calculate Customer Lifetime Value?
Let’s say you the one who takes care of the growth and retention for YouTube Premium.
Now you can calculate how much you will earn in one year if you know precisely how many users will stay with the service each month after the initial subscription started, for the next 11 months.
Let’s assume that the monthly subscription of YouTube Premium is INR. 10 (taking smaller values for better understanding) and you have acquired 100 users in the first month. And let’s assume that the user retention and the number of subscribers accordingly match the data in the table below:
With the monthly price of INR. 10, you get to the following monthly revenue values:
The total revenue for one year is INR. 2,810. Your one-year LTV is the total revenue divided by the total number of users in the cohort: INR. 2,810 / 100 = INR. 28
Now that you know a single user brings you INR. 28 in one year, you can compare it with your user acquisition cost.
Let’s assume you can acquire subscribers for INR. 20 with a Google display advertising campaign. In this case, you earn 8 rupees per subscriber in one year.
It’s a profitable business: You earn 8 rupees on 20 rupees invested, so you should scale this acquisition channel.
How do you get the retention numbers?
With the fixed subscription price and the fixed subscription duration period, you have only one variable, and that’s retention.
You can assume, for example, that 20% of your users churn every month, allowing you to calculate the retention for each month quickly.
The problem is most of the subscription churn is not linear. In reality, users leave at a higher rate in the first months, and the more time passes, the slower the unsubscribe rate is.
Usually, the retention curve has a steep decline at the beginning, flattens in the later months, and looks approximately like this:
Note: LTV and retention curves differ based on different user acquisition channels, geographies, and other factors.
If you feel like diving deep into your marketing performance and ways to improve it, you might need to slice the data into a large number of segments to analyze separately.
I hope this article is helpful, and you’ve understood how to calculate customer lifetime value (CLTV). Do share your thoughts and doubts in the comments section. Happy to help you.
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