The customer lifetime value of a startup: what exactly is it? Join us as we look at this important metric and how to calculate the LTV of a customer
Customer retention is exceedingly important when you’re developing a startup. You want to encourage loyal customers that keep buying your product or service and will also advocate your brand to others.
If you want to see how successful you are at retaining the customers you already have, customer lifetime value (often referred to as LTV, CLV, or CLTV) is a good metric to measure.
In this article, we’re not only going to look at how to measure the CLTVe of your startup or MVP, but what you can do to increase LTV over time.
- What is the customer lifetime value of a startup?
- How to calculate the CLTV
- What is the average customer lifespan?
- What is customer value?
- An example of calculating customer lifetime value
- The benefits of calculating CLTV for your startup
- What is the ideal customer lifetime value of a startup?
- How to increase the CLTV of your startup or MVP
- Encourage customer retention
- Increase your profit margins
- Use upselling and cross-selling
- Measure by customer segment
- End things on a good note
- In summary: customer lifetime value is one of the most insightful metrics around
(And don’t forget, if you’re looking for a startup consultancy that specializes in helping you retain loyal customers for your business, we’re here to help!)
What is the customer lifetime value of a startup?
Customer lifetime value is how much money a startup can bring in from its average customer over the course of its business relationship.
A high CLTV for your startup not only means you’re bringing in a lot of revenue, but your customers are extremely satisfied with your product or service.
The customer lifetime value metric works well with startups that offer a subscription model, for example, software as a service (SaaS).
How to calculate the customer lifetime value
While many businesses see the benefits of customer lifetime value, not all of them calculate it. Only 42% of companies are able to measure CLTV. This means if you can calculate CLTV for your startup, you’ve got a clear advantage over the businesses that don’t.
There are a lot of different ways to calculate CLTV. However, the simplest way is to multiply customer value by the average customer lifespan.
What is the average customer lifespan?
Average customer lifespan is the amount of time a typical customer has a business relationship with you.
What is the lifetime value (LTV)?
Lifetime value (LTV) is calculated by multiplying the average purchase value by the average number of purchases.
You can calculate customer lifetime value for your startup in two ways. You can use previous, pre-existing data to work out CLTV (‘historical’) or use forecasts and predictions to determine future customer lifetime value (‘predictive’).
Both have their advantages and disadvantages and will generate different results for your business.
It’s easier to get the data for historical customer lifetime value, but as inactive customers can become active at any given time and vice versa, it’s not entirely accurate and can easily be skewed. On the other hand, predictive customer lifetime value is great for identifying valuable customers and best-selling products and services, but you’re dealing with hypotheticals.
An example of calculating CLTV
Let’s say you have a mobile app with a monthly subscription. You work out that your average customer spends $4.99 a month. So over the space of a year, that’s $4.99 x 12 = $59.88.
The average customer stays with you for three years. So $59.88 x 3 leads to a CLTV of $179.64.
You don’t have to measure by years. You can measure by days, months, or whichever time period suits your needs best, as long as you use the same measurement each time to ensure consistency.
Some businesses factor profit margins into their customer lifetime value calculations so they can see how much money they are making from their average customer. This requires a little additional calculation but can give a more accurate result.
That’s the great thing about calculating CLTV; you can customize the metrics to your specific business needs.
The benefits of calculating customer lifetime value for your startup
It might be a little fiddly to get the metrics you need to measure LTV, but it’s one of the best metrics for measuring the health of your startup.
The main reason for measuring customer lifetime value is to see how many customers are staying with your business and how many are pulling away. If you discover that your CLTV is dropping, you’re in a position to put things right.
You can also use customer lifetime value to pitch to prospective investors in order to show them the value of your business. If you can show that customers stay with you for the long haul, you’re more likely to get the investment you need.
Finally, you can use it to make sure you’re focusing on the right customers. For example, in 2013, Amazon determined that Amazon Prime customers were spending twice as much as non-Prime customers. As a result, they opted to focus their sales and marketing efforts on Prime members.
What is the ideal customer lifetime value of a startup?
As with all metrics, the best company to benchmark against is your own.
A good way to see if your customer lifetime value is on the right track is to compare it against your customer acquisition cost, or CAC.
What is customer acquisition cost? CAC is the amount of money it costs to win a new customer for your business. In an ideal world, your CLTV should be three times more than your customer acquisition cost (a ratio of 3:1). This means your customers are spending three times more with you than the money you invested to get them on board.
So going back to the example we mentioned in ‘an example of calculating customer lifetime value’, let’s say your CLTV is $179.64, and your customer acquisition cost is $30. This means your ratio is 6:1, which is very good and suggests you’re in a good position to scale your business.
How to increase the customer lifetime value of your startup or MVP
So you’ve gathered the stats and discovered the CLTV for your startup. The only issue is that it’s not as high as you would like.
If you’re a newly launched startup, don’t worry too much, as you’ll be focusing more on acquisition than you will be retention. However, as you grow, you’ll want to make sure your customer lifetime value is as healthy as possible.
The good news is that there are things you can do to increase customer lifetime value for your startup. Here are some of our top tips for CLTV success.
1. Encourage customer retention
One of the best ways to increase LTV is to do what you can to keep customers around for as long as possible. You can do this in the following ways:
- Creating an onboarding program to introduce customers to your product or service and answer their questions
- Respond quickly to customer queries and complaints
- Use customer feedback surveys to make existing customers feel valued and shape the direction of your startup or MVP
- Reengage customers with retargeting adverts and personalized emails
- Offer exclusive discounts and gifts to thank existing customers for their custom
- Create an exclusive ‘VIP group’ to make customers feel special
- Start a customer loyalty or rewards program to motivate customers to buy more often
Think outside the box to promote retention – even small changes can entice customers to stick around. For example, Coca-Cola’s ‘Share a Coke’ campaign with personalized bottles and cans encouraged customers to find their names and keep buying drinks!
2. Increase your profit margins
It might be that you have a lot of long-term customers, but you’re not making as much money out of them as you would like. If this is the case, increasing your profit margin can boost your CLTV.
There are two ways you can do this. Firstly by reviewing your processes and seeing where you can make savings. Secondly, by increasing your costs. If you do go down this route, make sure you continue to offer value; otherwise, you may see customers end their relationship with you.
We’ve mentioned Netflix before on this blog, but the streaming company lost subscribers this year after putting its prices up, for the first time in a decade.
3. Use upselling and cross-selling
Cross-selling is when you sell similar products to a customer at the same time that they make a purchase. Conversely, upselling is when you encourage them to buy a higher-value product.
For example, let’s say you offer a freemium version of your mobile app. You can regularly promote the added value the paid version of the app provides, enticing customers to upgrade.
Both of these strategies can increase the amount of money that customers spend with you, giving your CLTV a boost.
4. Measure by customer segment
Segmenting your customers and measuring the CLTV for each one can be a good way of identifying which target audience to focus your efforts on. After all, that’s what Amazon did when it recognized that Prime customers had a higher customer lifetime value than non-Prime customers!
This method of measuring CLTV can take a while to perfect but can be incredibly insightful when done right.
You can even take it one step further and measure the customer lifetime value of individual customers. This strategy works best if you have a high-value product and a small cohort of customers. That way if one of them tries to cancel, you know how much effort to put into keeping their custom.
5. End things on a good note
Sometimes losing a customer is unavoidable. Perhaps they no longer have the budget or need for the product or service you offer.
If this is the case, it’s always good to handle the situation in a positive way. Ask them for their feedback and thank them for their time. That way, if they come back into the market for the same product or service, they’re more likely to come back to you.
In summary: CLTV is one of the most insightful metrics around
All startups dream of loyal customers that stay with them from launch all the way through to exit. By measuring customer lifetime value, you’re one step closer to seeing how passionate your customers are about your product or service.
Focusing on customer retention is one of the easiest ways to grow your lifetime value. A 5% increase in retention can lead to at least a 25% increase in revenue, so find your existing customers and do what you can to keep them!
This article is part of a series about metrics you can use to measure the success of your startup. We’ve already looked at churn rate and customer acquisition costs… stay tuned to find out about more useful metrics!
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