Lifetime Value (LTV) or Customer Lifetime Value (CLTV) is the overall value of a client to a company throughout the course of their entire relationship. This indicator estimates the average revenue that a customer will generate during its customer lifespan.
Customer lifetime value increases the more frequently a client purchases from a business.
Customer success teams and support teams have direct control over this measurement throughout the customer experience. CS managers and customer support representatives are crucial in resolving issues and making recommendations to improve customer retention and rate of churn.
The importance of lifetime value to a business
Customer lifetime value (CLTV) is a business metric that measures how much money a company could potentially make over the life of an individual customer relationship.
In essence, it is a way of calculating how much customers are worth to an organization.
What to do with a company’s CLTV?
CLTV is an incredibly powerful metric that allows business owners to better understand their current customers.
The lifetime value calculation can help organizations identify whether or not their product, marketing, and sales efforts are working, determine whether they are losing money due to churn, or help them make informed decisions regarding pricing, product development, and marketing strategies, to name a few.
How does churn affect the LTV?
One thing that often gets overlooked when it comes to CLTV is churn. Churn is the percentage of customers who cancel within a certain period of time. For example, if the average churn rate is 10%, that means that every year, 10% of a company’s customers will leave.
When looking at CLTV, it is important to remember that churn affects both the numerator and denominator. The numerator is the average monthly spend on all customers. The denominator is the number of customers.
For SaaS SMB and mid-market businesses, a good rule of thumb is to keep monthly churn rates between 3% and 5%. However, for SaaS B2B established enterprises, a good monthly churn rate would be between 1 to 2%.
10 benefits of understanding your customer lifetime value
Having an understanding of a business’s customer lifetime value is crucial because:
It helps plan for growth by predicting purchase frequency and future demand.
It helps recognize how customers behave when doing business with a company to establish stronger bonds.
It helps develop more effective retention programs to lower attrition and increase customer retention rates.
It aids in improving product profitability and selecting the right price point.
It evaluates the success of marketing efforts and helps maximize marketing investments.
It helps manage the customer experience while boosting customer loyalty.
It helps make forecasts more precise and the sales funnel more effective.
It aids in determining the most effective resource allocation.
Compared to the current costs, it helps reduce customer acquisition costs.
It contributes to greater customer satisfaction by improving customer service.
