Customer Lifetime Value (CLTV)Link to this section
Acquiring new customers is expensive and time-consuming. So, you want to make sure you’re attracting high-quality users and keeping them engaged with your platform for the long term.
One metric that can help you review your acquisition and retention efforts is customer lifetime value (CLTV), also known as Lifetime Value (LTV).
What is Customer Lifetime Value (CLTV)?Link to this section
CLTV is the expected revenue an average customer will generate for your company. Calculating this metric can start to give you an insight into the success of your acquisition and retention efforts.
CLTV = Average revenue per user (ARPU) / Churn rate
To calculate your ARPU, divide the total revenue generated by your users in a specific time period by the total number of users.
A company generating $1000 in revenue in a month from 10 users would have an ARPU of $100.
If over the same period they lost 1 customer, their churn would be 0.1 (Customers lost divided by total customers).
Therefore, their CLTV would be $100 x 0.1, totalling $1000.
Why is CLTV an important metric?Link to this section
How much value is each user delivering for your company? Are certain user segments more valuable than others? Are your acquisition strategies targeted towards your most valuable user segments?
CLTV helps to answer these questions. While it needs to be used alongside other financial metrics, understanding the lifetime value of your customers is key to informing and improving your acquisition and retention strategies.
By slicing and dicing your CLTV by different audience segments and acquisition streams, you can start to pinpoint your highest-performing marketing channels.
1. Informs your acquisition and retention strategiesLink to this section
Bringing new users onto your platform takes time, money and resources. With a clear view of your CLTV, you can start to proactively plan out your marketing budgets and how much you can afford to spend on acquisition.
That’s because you’ll have an idea of how much value your users are likely to generate for your company over their lifetime (even if it’s based on an average, estimate or prediction).
At the same time, your CLTV can be used to review your user retention strategies, too. If you’re noticing a low CLTV, a poor retention strategy could be one factor at play.
2. Help you assess the quality of your usersLink to this section
CLTV can reveal helpful insights into how much value your customers are delivering for your company.
Importantly, this metric can help you assess the quality of your users, both in terms of how long they’re engaging with your company and how much revenue they’re generating over this time.
Typically, high-quality users will be engaged for a long period of time and will continue to generate revenue for your company over their account lifetime. On the flip side, lower-quality users will likely churn quickly and will generate a low amount of revenue over their account lifetime, too.
3. Provides data to strategically review marketing budgetsLink to this section
This is where audience segmentation comes into play. As you can see, CLTV can help you assess both the quality of your users along with how effective your company is at acquiring and retaining them.
But, you can take things one step further and assess which specific audience groups are delivering the most value for your company.
To do so, you’ll need to narrow down which users are included in your CLTV calculations. By segmenting by different user groups (and even by different acquisition channels), you can pinpoint your highest-quality user segments and most cost-effective acquisition channels.
From here, you can start to make informed decisions about where to invest your marketing budget and which audience segments or acquisition channels are most likely to deliver a strong return on your investment.
Tips for increasing CLTVLink to this section
A higher CLTV typically means you’re winning on two fronts: customer acquisition and retention.
By calculating your CLTV, you can learn whether your current marketing strategies are pulling their weight. Plus, by segmenting your CLTV and comparing the lifetime value of different users and acquisition channels, you’ll figure out if you need to refine the audiences you’re targeting or the channels you’re using.
If you’re looking to improve your CLTV, you’ll need to review both your acquisition and retention strategies.
How to acquire more valuable customersLink to this section
First up, you need a clear idea of which customer segments are the most valuable to your company.
By diving into your financial data and segmenting your CLTV based on different audience groups, you can pinpoint your highest-value vs. lowest-value customers.
With these insights in mind, you can start to test which marketing channels are the most effective in attracting and acquiring your most valuable customers. From social media ads to paid search, tracking the performance of your acquisition channels and campaigns can reveal where to focus your marketing budget.
The key is to look cost-effective acquisition strategies that help you attract high-quality users at scale (and at a low cost).
How to improve your retention strategiesLink to this section
Secondly, improving your CLTV means increasing how long customers stay engaged with your company.
Retention strategies can take many forms, but the ultimate goal is to generate more revenue from your current customers over the lifetime of their accounts.
Prioritize education: help users extract more value from your product and unlock its full potential with content that upskills your user base. Masterclasses, webinars and educational resources can boost user engagement and help lower the chance of churn.
Focus on customer support: make it easy for your customers to get their problems solved quickly and efficiently. A mix of self-service and hands-on customer support ensures users have a smooth, satisfied customer experience.
By tracking your customer lifetime value (CLTV), your company can proactively assess the performance of your acquisition and retention strategies. Plus, you can start to run further calculations that will help you pinpoint your most valuable user groups and your most cost-effective acquisition channels, too.
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