It's the revenue a customer will generate over the course of your relationship.
Formula: annual recurring revenue per customer x average customer lifespan
Items needed to calculate LTV:
MetricDefinitionFormulaARR per CustomerHow much yearly revenue clients will generatetotal annual recurring revenue ÷ number of clientsChurn Rate% at which customers stop doing business with you.clients that left during the period ÷ clients at the start of the periodCustomer Life in yearsOn average, how long customers stay customers.1 ÷ your churn rate
Why is LTV important:
If you’re analyzing trends it can point to either the improvement or decline in your retention and/or pricing efforts but on its own, LTV is simply a data point.
When it’s used in LTV to CAC it can help with forecasting revenue, is a sign of the health of your sales, marketing, and customer success teams, and can highlight where to allocate resources.
How to improve LTV:
Improving a customer's lifetime value is to maintain a healthy client relationship for as long as possible while keeping support costs low. Increase lifetime value through a combination of decreasing churn / improving retention and increasing subscription prices.
Have a thorough onboarding program. Tailor it to each client's needs so they know which features will provide the most benefit to their teams.
Seek to delight. Provide excellent customer service. Be accessible on different channels and devices at any time, add the human touch, and ensure no one has a poor experience.
Stay close and relevant. Produce tactical content and maintain an up to date knowledge base that your clients can access anytime and easily navigate.
Keep in mind:
LTV is revenue. LTV considering your gross margin is profit.
Not all customers are created equal, some are enterprise level who spend much more than SMBs ever will. To get accurate LTVs we suggest segmenting into low, mid, and high spending customers to determine average ARR per customer.
It’s helpful to analyze your LTV on a rolling 6 month basis to account for any outliers that may skew your numbers.
Customer life can be confusing but think about it this way: if your churn rate is 10%, that means 10% of your clients will churn in the first year and 20% will have churned by the second year. If you project that out until you hit 100% (meaning you’re left with zero clients), you get your customer life in years. In this example, it’s 10 years.
Words of Caution: LTV on its own will be an incomplete representation. It leaves you with a revenue number that doesn’t account for upsells or delivering your product or service to customers which leaves an inflated number.