Blog / LearnSaturday, February 1, 2020

how to calculate customer lifetime value

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how to calculate customer lifetime value

Customer lifetime value, or CLTV, can be used either for real time analysis or as a prediction model for your business.

By using CLTV, you can calculate what customers are worth to your business, both individually and collectively. This can then be used either as a single metric or in conjunction with others to map out future strategies to help increase CLTV, reduce churn, and grow your business revenue and profit.

What is Customer Lifetime Value?

Customer lifetime value, or CLTV, is the amount of revenue you can predict a customer will generate when they subscribe to, or buy, your product or service. 

For example, if you sell your SaaS platform at a subscription cost of $39.99 per month, and the customer signs up for six-months before unsubscribing, their individual CLTV will be $39.99 x 6 months, equalling $239.94.

When you add this up for all your customers and calculate the average, what you’re left with is the average CLTV in relation to your product or service.

Let’s say that your business mirrors the example we have above. This would mean that every time a new customer takes out a subscription, you assume they’ll spend at least $239.94 with you.

Using Customer Lifetime Value in Your Business

You can use CLTV for several purposes:

  • To predict what new customers, on average, will spend.
  • To predict how long new customers, on average, will remain with you.
  • To analyse the reasons why customers unsubscribe, and formulate strategies to increase CLTV.
  • In conjunction with other metrics to get a fuller picture of how your business is performing.

Focusing on CLTV instead of basic sales can help you to shift your analysis and your perspective towards building long term relationships and managing your customers effectively.

Your sales team might be great at getting delivering sales that bring in $500 each time for your business. If those $500 customers never buy from you again, would it not be better to make $100 sales that repeat over an extended period?

When you factor in other metrics such as cost per customer acquisition, it’s likely to be more profitable for you to retain customers than always being focused on acquiring new ones.

How to Calculate Customer Lifetime Value?

Calculating CLTV is simple to do. We’ve provided two calculations below, so that you can calculate your “real terms” CLTV by factoring in the customer acquisition cost (CAC). Remember that you can calculate this on either a “per customer” basis or, as is more common for bigger picture analysis, across your business.

Use the below customer lifetime value formula to get your calculation.

Calculating CLTV in Revenue Terms:

CLTV = Regular payment x Subscription length

CLTV = $39.99 x 6 months

CLTV (Revenue) = $239.94

Calculating CLTV in Profitability Terms

CLTV = (Regular payment x subscription length) – CAC

CLTV = ($39.99 x 6 months) - $175

CLTV = $239.94 - $175

CLTV (Profitability) = $64.94

As we can see from the customer lifetime value calculations, working out your CLTV in profitability terms is a far more favourable outcome. Doing will give you a greater insight into your wider business processes and might show you that you need to focus on reducing CAC as well as on building your customer relationships.

Your CLTV calculation should only be a starting point for improving and growing your business, and not as the end result!

Use Upodi’s customer lifetime value calculator at the top of the page to discover your business’ CLTV!

A Real-Life Example of Customer Lifetime Value with Amazon Prime

To help you further understand how to calculate CLTV, we’ve put it into a real-world example.

An Amazon Prime membership costs $12.99 in the United States. While Amazon has not made available any data that gives the average length of a subscriber tenure – why would they, when such data would be valuable to Netflix and other competitors? – it has been widely reported that over half of United States households are subscribers, which is a colossal number.

Let’s say that the average subscriber who pays for Amazon Prime on a monthly basis subscribes for 65 months.

That would mean that Amazon would calculate their CLTV as below. We have no way of knowing Amazon’s CAC – this would be a complex calculation as it’s likely many subscribers previously bought something from Amazon and could have reached the site via multiple channels – so we’ll calculate this based on revenue only.

$12.99 per month x 65 months = $844.35

Of course, Amazon would factor additional numbers into that. For example, it is reported that Prime subscribers spend an average of $1,400 a year shopping on Amazon, so some of this would potentially factor into the CLTV if Amazon felt that Prime benefits, such as free next day delivery, helped to drive purchasing decisions.

Why is Customer Lifetime Value an Important Metric? Why Should You Focus on This to Grow Your Business?

CLTV is an important metric as it can help you to focus your resources more effectively within your business. As we explored earlier, it is likely to be more effective and profitable for your business to focus on maximising value for and from your existing customers than it is to continually be acquiring new ones.

Focusing on CLTV is to focus on a long-term vision and growth for your business. By aiming to increase your CLTV, you must focus on improving your customer relationships from the moment you acquire them. Such focus could help your business to improve everything from sales conversations and client onboarding to ongoing service and how you manage the discussion when customers call you to cancel.

When you’re selling SaaS with a subscription model, a higher CLTV means your customers are staying with you for longer.

Focus on CLTV for business growth to ensure you earn recurring sales and continue to build your customer base.

How Can You Increase the Lifetime Value of Your Customers?

There are three main ways you can increase your CLTV.

  1. By Reducing Your CAC. Even if your business already has a healthy CLTV, is your sales process as effective as it could be? If you reduce your CAC, you’ll improve your CLTV and make your business more efficient before you’ve even considered how to improve retention!
  2. By Upselling Your SaaS Platform. It’s said that the easiest way to increase your revenues is to sell more to those who are already loyal customers. You could increase your recurring revenue from existing customers in several ways. Offering incentives, such as discounts, to move into a higher pricing bracket or tier could be one way to do it, or you could simply demonstrate how a customer would benefit by paying to unlock an additional feature that you offer.
  3. By Improving Your Service. There could be many specific ways in which you could improve your service, both in terms of the SaaS platform itself as well as actual service in terms of customer interaction. Sometimes, you may even find that it’s your sales or marketing that’s the problem, as the message given to customers doesn’t match the experience they have when they do subscribe. It is wise to continually seek customer feedback, too, as this will help you to be proactive and address any potential issues before you see a dramatic increase in churn and a similarly dramatic drop in CLTV.

How to Work with Customer Lifetime Value in Upodi

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