Customer Lifetime Value
The net present value of the cash flow relationship with a customer.
The nuts and bolts: Customer lifetime value refers to a customer’s total value to a company over the course of their relationship. It’s a crucial metric because keeping existing customers costs less than acquiring new ones, so increasing the value of your existing customers is a great way to drive growth.
Customer lifetime value sounds like a fancy word, doesn’t it? Well, it is fancy, but it’s a very important aspect of how we do business around ZURB. In fact, calculating a customer’s lifetime value, or LTV allows us the flexibility to be aggressive with our marketing strategies. And it can be crucial in a SaSS business model, where we’re making money by providing a service each month, like with our app Helio.
Customers pay a fixed amount each month for that service and you can’t assume those customers will continue paying forever. There will be a drop-off rate over time, which we calculate as the churn rate. The churn rate helps us determine our retention rate — the key to being able to calculate a customer’s lifetime value. A few years ago, we came across Andrew Chen’s formula for calculating the lifetime value of a customer. It’s something we still use today:
LTV of an account = (1/(1-retention) * revenue) / accounts
The number we calculate from the customer lifetime value is important in forecasting our spending to earn new customers. Recently, we saw a jump in our customer lifetime value when it comes to Helio customers, all because we layered in complexity in the form of tiered features and pricing. That gives us the ability to be more aggressive with our marketing efforts.
When calculated properly, the Customer Lifetime Value is a metric that can help businesses understand what investment can be reasonably earned from earning a new customer.
Get to Know Your Customers Better
With Helio, you can validate your audience before you calculate your Customer Lifetime Value. Our easy to use template gets you started quickly!