What is customer LTV (lifetime value)

“I need powerful and inexpensive traffic!” After this phrase, I restrain my desire to strangle the client and ask a counter question: “How much is inexpensive? Specifically in numbers ”.

And guess what's going on? The client naturally begins to swim. First, inexpensive is a different concept for everyone.

Secondly, well, he does not know specifically. Feels like yes, but specifically no. And all because it does not count the ltv indicator.

Not many marketers know the word LTV, so there is nothing to be surprised about leaders and businessmen.

If we take the companies that consider it, then the fingers are enough. But all this is in vain! After all, precisely because LTV is not counted, or is considered incorrectly, many companies are shutting down. Therefore, let's figure out what it is and how it can help a classic business.

Scary abbreviation

To paraphrase a famous phrase from a Soviet film, “I need LTV, aka Lifetime Value, aka CLV, aka Customer Lifetime Value”.

Yes, it's that simple. But we live in Russia, so here are some descriptions in our native language.

LTV - life cycle client.
LTV is the lifetime value of the customer.
LTV is the amount of money that the client leaves in the company for the entire time of interaction with it.

It's clearer this way, although we're not done yet. In simple terms, or place it all in a diagram, then this concept looks like this:

The customer makes the 1st purchase;
The customer makes the 2nd purchase;
The client makes the 3rd purchase;
The client makes the 4th purchase;
The client makes the 5th purchase;
The client leaves.

LTV is the time interval between the first point and the last. His lifespan and the amount of money he leaves during this time. But this is a first class understanding.

We, as professionals, consider the life cycle of a client from the moment when a person first saw our advertisement, because we have already invested money in attracting him.

Correct focus

I put a lot of emphasis on the cost of traffic. This is the whole point of LTV.

That is, knowing how much the client brings you money during the "life together" with your company, you can calculate how much money you can invest in attracting him.

But first, a little digression. There is a concept of CAC. In English, this is Сost of acquiring customers, and in Russian, it is the cost of acquiring a customer.

And when the cost of attracting a client is higher than the money that the client brings in during its lifetime, then the companies go broke.

Therefore, in this article, we will calculate not only LTV, but also the value of your client.

Although this is not the only indicator that our hero of this article affects. Also with the help of LTV (Customer Lifetime Value) you can:

Find your ideal client. The ones that bring more money and live with you the longest.
For which you can arrange special and to maintain purchasing power.
See the real one. Or even drastically change your marketing strategy.
Improve . It is especially important when attracting a customer is expensive and the first purchase barely pays for it.
But you also want to make money, and for this you need to raise it to you.

As a result, more money earned and a lot of money saved. Indeed, based on the ROI recalculation and the revision of the marketing strategy, you will be able to single out who bring ideal customers and leave only them.

However, companies that are just starting out are unlikely to be able to implement this, since the calculation of LTV requires statistics of customers and their purchases.

Although no, I'm wrong. If you take the same Uber (taxi), although they "burned" at the start stage almost 1 billion dollars to attract customers.

But all the same, through analytical data and the experience of other companies, they knew what the average life cycle of a client is. Therefore, we achieved such success through such a model.

Its cool!

Your one-time deals

Is it a pity after this meaning to treat him with a few pies or even dinners ?! Everything changed again in just a matter of seconds.

A case in point

Let's imagine a situation. You have an eco-food store. Two customers come to you and make purchases.

P.S. After you know the value of the customer, the next problem will be this frequency and increase the cycle to infinity. And this matter is more complicated.

LTV, or LifeTime value, is an important metric in marketing. Of course, any company wants to work successfully and effectively promote its services on the market. To do this, she needs to pay due attention to the formation of a competent marketing policy in the Internet environment and give preference to effective advertising strategies.

In many areas, the cost of acquiring a customer turns out to be higher than the cost of his purchases. Therefore, first of all, you need to work on increasing consumer loyalty and make every effort to ensure that a person wants to contact the company again. In this case, the firm begins to receive income from the client only with 2-3 cooperation. The LTV indicator helps to understand how much it will be rational to spend on attracting each new buyer in a highly competitive environment.

The American company HubSpot found out which first sentences do not inspire the reader, but, on the contrary, force them to delete the letter.

In our article, we have collected 5 such phrases, and ways to fix mistakes.

LifeTime value - what is it

LifeTime value ( English Lifetime Value) is part of the SaaS space. Today, it is the LTV index that is most interesting for marketers to research. At the same time, LTV is very difficult, both in terms of calculations and in assessing and applying the results. How do you get LTV and how do you use it?

LTV, or LifeTime value, is the amount of money that a particular client is expected to bring you during the period of cooperation. For example, the cost of your services is $ 100 per month, and you plan to interact with the customer within a year. So his LTV is $ 100 x 12 = $ 1200.

In LTV-based cloud marketing, you calculate the amount you can spend on acquiring new customers. For example, if to attract one customer, or CAC ( customer acquisition cost) you will spend $ 100, and its life cycle will be equal to $ 500, after calculations your profit will be $ 400.

The higher the LTV and the lower the CAC, the faster you earn.

But not everything is so simple. In general, the circuit is correct, however, for long-term operation this is not the best way... There are many reasons for this, and one of them is significant differences in clients.

First of all, you should be aware of the LTV of all segments of your products. When it comes to SaaS, segments are identified based on the cost of the service package. For example, Nikolay's LTV, which has a monthly tariff plan of $ 30, differs significantly from Mikhail's LTV with his $ 200 a month. And the difference is not only in the price.

With LTV you can

Define real ROI in terms of the cost of attracting a new customer. At the expense of LTV, you will select the most effective channels for attracting a paying audience. It is certainly wiser to improve your marketing channels based on the profit you receive from the customer over the life of the customer, rather than on the income from their initial purchase. Accordingly, you will have the opportunity to maximize the lifetime value of the customer relative to the cost of acquiring a new one (CAC). If you do this, your audience engagement strategy will change completely.

It is possible that you will see from your side extra costs for these purposes. At the same time, you will learn not only about how much profit one purchase brings, but also about how much the consumer allows you to earn for the entire time of interaction with him. With high LTV customer data, you'll know exactly who to target. This will allow you to bypass competitors who do not have such information.

Improve customer retention strategy. The value of a marketing campaign (for example, one that turns a random customer into a repeat customer) should not be based on current income. The value should be assessed in terms of the impact on the average LTV in the consumer segment you are targeting. How does this change the trajectory of LifeTime value that the average customer brings? For calculations, you need accurate analytical data. Only in this case it will be possible to study how different marketing activities change LTV.

Create more effective messaging, targeting and customer information Comrade Estimate your audience and assign people to groups based on LTV. You can make your marketing campaigns more effective by using personalized messages. An important variable that applies in this case is the types of products that you sell to consumers in different segments.

To improve behavioral triggers. Through the use of cluster techniques, you will be able to find new behavioral triggers that stimulate your customer to buy a product for the first time. It will be possible to use a similar behavioral factor with new potential customers, encouraging them to make their first purchase.

Improve productivity through customer support. Pay attention to your best clients. There are significant differences in consumer life cycles for one reason - churn. Typically, significant churns occur in the segment of users with low tariff plans. Keep this in mind when calculating the LifeTime value for each category.

As noted above, thanks to LTV, it is possible to understand how much a company can spend on finding and attracting an audience. For example, if the average user costs $ 220 and the expected profit is $ 100, it makes no sense to collaborate with such a client. That is why accounting for churn for each customer group when calculating LTV is so important.

5 LTV steps to manage customer lifecycle

Step 1. Segment the customer base.

At the heart of LTV marketing is identifying customer groups that behave in a similar way. Companies use a number of techniques to segment their audience.

The classic segmentation of the Boston Consulting Group, created more than 50 years ago, is often used. According to it, buyers are divided into groups: "brown bears", "sleeping marmots", "cash cows", etc.

But the most rational, which allows you to get the most accurate data, is RFM segmentation. This method is based on 3 parameters.

LifeTime value is calculated for a certain period... It is directly influenced by the cycle of use of the company's products. In other words, the length of this period depends on the frequency of purchases. The more often purchases are made, the shorter the counting period should be. For example, in relation to products that are purchased every day, this period is six months. If we are talking about high-value goods, it is longer. So, for the sale of clothes, the period is one year, since they are rarely bought.

Metrics (RFM) can be combined in different ways. It all depends on the length of the period covered. In the future, the indicators need to be distributed across 5-6 large segments in order to make it convenient to work. Customer classification can be based on the similarity of the transformation rate. Based on the analysis of purchases made by customers of a particular outlet during the year, you can develop a table similar to Table 1. Months during which consumers did not buy anything are indicated as 0, months in which purchases were made - 1. Customers were divided into 5 groups.

Based on the data shown in the table, you can guess what the likelihood is that a consumer from each group will buy something within a certain time. For example, those who have not decided on what to do may or may not purchase the item next month. At the same time, customers who have already made purchases more than once will buy something again, since, apparently, they are satisfied with both the assortment and the price.

From all of the above, a reasonable conclusion can be drawn. Since the ability to determine whether a purchase will take place or not is different for a particular segment of consumers, it is also necessary to influence these segments with the help of marketing methods in different ways.

The next step is figuring out how to manage segments and choosing marketing tools for each.

Step 2. Determine the key goals of LTV marketing.

So, customers are divided into segments. Next, you need to analyze the performance of each segment. Good and very good consumers rather little space is allocated in the database - 6% and 2%. However, it is thanks to them that the company manages to sell most of the goods (33% and 30% of the total).

With this information as a basis, you will set new marketing goals. For example, if you increase the percentage very much good clients by 0.1%, sales will increase by 3%. At the same time, consumers who have not yet made up their minds will help increase sales by only 0.6%.

Conclusion - it's better to invest in increasing the number of very good clients.

This information helps answer the main questions in LTV marketing:

how high-quality the client base is in the ratio of active and passive consumers (information is reflected in the "Transformation rate" column; here it is 8% of active consumers, which is generally not bad);
to which clients the company directs the main funds of the marketing budget and how much (you can find out about this thanks to the indicator "Share of the segment in the base"); if the marketing budget funds are not allocated to groups, the costs for all consumers (both "good" and "bad") will be the same; while the firm should not spend about half of the budget on "sleeping" clients;
what is the ratio of marketing costs and consumer value for the enterprise (stimulation is required for high-income segments of the base, reflected in the indicators "Share of the segment in the volume of sales");
which of the segments needs growth and development (as a guideline, you can take "Number of purchases", " Average cost shopping "and" Gross Profit per active client ");
what goals the business owner pursues when cooperating with these consumers, and what KPI is his marketing actions aimed at (first of all, it is necessary to increase the number of profitable customers).

Step 3. Managing the customer life cycle.

The company should study the life cycle of consumers, that is, understand how they move from one segment to another. If you have this information, you will better understand which marketing activities are more rational. The basis of a particular marketing strategy should be the ability of the client to move from segment to segment. For this, a transition scheme is developed for a specific period, for example, a month.

It is necessary to understand the peculiarities of the behavior of new buyers. Only 10% of consumers re-purchase a product or service during the study period, moving from the category of new to the category of good customers.

If the difference in sales and income between categories is very significant, even the slightest increase in conversion will affect sales. Lost sales are found right here: customers move into the undecided category with much poorer characteristics.

Only 7% move from the undecided segment to the good and very good groups. At the same time, the outflow from the very good segment is 36%. From the undecided category, 13% of customers stop buying the company's goods or services, leaving for the sleeping segment. The number of people waking up is only 3%. When you supplement this information with information about the volumes and amounts of purchases, it becomes clear that most of all the company should value customers whose life cycle has gone through the categories of good and very good. That is, the basis for the formation of an LTV marketing strategy should be the distribution of consumers by categories and an awareness of how they move from one category to another.

Step 4. Set goals and develop LTV marketing strategies.

At this stage, they determine what goals need to be achieved when working with a particular segment. They also form a marketing proposal, evaluate which channel and at what time it is better to interact with customers. In addition, the company creates a budget for marketing purposes, determining how much for which customers it is willing to spend.

This marketing strategy is based on the principle that the company should strive to transfer the maximum number of new customers to the good category, increase the number of this category and keep the indicator at the same level for a long time. Should be maintained competent work to ensure that as few buyers as possible went into the undecided category. With all this in mind, the company should use appropriate marketing tools.

Universal marketing tools have not yet been created. For example, it seems that the 50% discount always works. However, according to the test results, customers of the “very good” segment purchase products without discounts. That is, they do not need additional incentives. When a company provides a discount, it only loses money and creates a situation in which it will be difficult for it to sell the product in the future without additional incentives.

New clients. In a good way an incentive present, or welcome pack, will increase consumer loyalty. The seller, along with the first order, sends little present and an NPS questionnaire that motivates the client to make a new purchase.
Good clients. They can deliver orders for free and periodically send e-mails along with personalized recommendations. The mailing list should be started one month after the client last bought something. It was during this period that the risk of his transition to the undecided segment is especially high.
Very good clients. Consumers in this segment should be encouraged with birthday gifts. It is better to serve them in the call-center out of turn or individually. Clients must have a personal manager. Please add attachments to all orders upon shipment. Communicate with very good segment consumers no more than once a month and a half.

These buyers are the most expensive for the company in terms of marketing costs. These costs are 6 times higher than costs for new customers and 2.5 times higher than for a “good” audience. The costs for each individual category depend on the income that it is expected to generate.

Step 5. Eliminate marketing mistakes at the stages of the customer's life cycle.

Starting to use LifeTime value in marketing, you can make certain mistakes, due to which the events held will not be as effective.

Incentive for customers who have just made a purchase. Do not forget about the so-called natural period of demand among consumers (the time period after which a person again tunes in to a deal). If you attack a customer without waiting enough time, he will behave unnaturally, and after you stop pushing him to buy, the parameters will only deteriorate. It would be wiser to track after which period the consumer purchases the goods again, and leave it alone until the end of this period.
Organizational separation of marketing from the rest of the company. Role customer service it is difficult to overestimate when it comes to keeping customers in the best segment. Don't waste your money on discounts for good customers. Better invest in quality customer service and try to find an individual approach to each consumer. If these conditions are met, there will be no problems with retaining good and very good customers. In this sense, it is very convenient to use a CRM system, which allows at each stage of interaction with a customer to find out in which segment he is at the moment. If the company has such information, it will provide the appropriate customer service. If difficulties arise at one of the stages of communication with a consumer, you will know who this person is and how to work with him. This approach to the client today is the pinnacle of LTV marketing.
Ignoring the impact of customer acquisition channels on their life cycle. Marketers usually measure how effective acquisition channels are based on the cost per customer metric or per purchase. However, it is better to focus on the life cycle of consumers entering through different marketing channels. The result in this case is more reliable. For example, the number of customers who bought products for the second time (that is, moved from the category of new to good ones) and came from channels for comparing prices for goods is 15%. The share of consumers who came through the "call-center" channel is 24%, through partner channels - 38%. Note that the most costly in terms of attracting customers are precisely partner channels.
Lack of involvement of top management. If the management is not interested in LTV marketing and does not understand that after mastering it, it will be possible to significantly increase the efficiency of the company, you should not even try to implement this system. LTV marketing cannot be trimmed down. When implementing it, you need to accurately verify the parameters, carefully and effectively interact with all categories of customers, constantly conduct tests, calculate the results, and build business processes for each segment from scratch. If the company is not ready for these and other events, there is no need to start working with LTV.

Based on the article by Juliana Gordon How to find the most profitable clients using LTV marketing

LTV calculation methods

Of course, in the initial stages of using LTV, the company will have to spend more than earn. The costs associated with promoting products or services, attracting and retaining customers are inevitable. However, sooner or later, you will still have to calculate indicators on income and expenses. The firm must measure its profit, that is, the difference between income and expenses. For an individual client, this means that he must bring in more money than the company spends on serving him.

LTV - CAC = Profit

LTV stands for “customer lifetime value”, Customer lifetime value is the probable profit that an average customer of your company can bring during the entire period of cooperation. The indicator is calculated in financial terms (CLV, LCV, CLTV).

CAC - Cost per customer acquisition. The indicator is measured in dollars (aka CPA).

They calculate Customer lifetime value, first of all, in order to solve the main problem - to optimize marketing costs. You need to manage costs based on information about the channels of customer flow, the cost of marketing communications and the value of cost effectiveness for all channels separately.

Two formulas for calculating LTV - customer lifetime value

This is the simplest LifeTime value formula:

LTV = S × C × P × t, where

S - average check;
C is the average number of purchases per month;
P - profitability as a percentage of the check amount;
t - the average "lifetime" of the client (the number of months during which he purchases the goods).

Another formula is also used:

LTV = (S × C × P) / (1 - R).

It differs from the previous one in that the “lifetime” in this case is replaced by the percentage of consumers who left (R).

LifeTime value is calculated using a more complex method. ARPU (Avg. Revenue Per User) is multiplied by the average life expectancy (Avg. LiveTime). Service costs are subtracted from the resulting indicator for the period of its life cycle (Cost to Serve):

LTV = Average Revenue Per User x Average LifeTime of a Customer - Cost to Serve them

ARPU stands for the average income per customer over the period. Determine the period based on the life cycle of your products. If months are used to measure LifeTime, ARPU shows how much the customer will pay during the month.

It is not very clear when calculating the ALT indicator (Avg. LifeTime) - the average lifetime. When calculating, it is better to use another factor - the Churn Rate, or the percentage of customer abandonments during this period. Let's say the total number of clients is 200 people. It left 10. Therefore, the turnover was 5%. It turns out that the lifespan is a kind of unit divided by the outflow of consumers as a percentage.

Average Lifetime of a Customer = 1 / Churn Rate.

The role of this indicator is very important, because if it doubles, the customer's life cycle is also shortened by half. This means that the average profit that a given consumer brings is reduced by 2 times.

Cost to Serve includes infrastructure and support costs.

Customer Acquisition Cost is a measure of the cost of a new customer.

CAC = Total cost of Sales & Marketing / No of Deals closed.

According to various estimates, LTV, for example, for newly created companies and projects should be three times more CAC (especially for SaaS).

How to optimize your LTV strategy

Below is a graph showing the methods of balancing the model.

Tools for reducing CAC:

Viral effects - viral advertising.
Inbound Marketing - engaging content and communities without ads.
Free or freemium - the free part attracts an audience to you at a fairly low cost.
Touthless conversion - reducing costs by reducing the degree of human participation in sales.
Inside Sales - office sales.
Channels - sales through partners.
Strategic partnerships - strategic partnerships with companies with a client base.

LifeTime value growth tools:

Recurring Revenue. The goal is to increase monthly income by increasing the base of regular customers and orders on which you earn monthly.
Scalable Pricing is a scalable pricing model.
Cross Sell / Upsell - if you have a large client base, you can conduct additional sales of secondary services and products.
Product line expansion - expansion of the product line.
Lead Gen for 3rd parties - generating leads for third parties through partner companies.

Churn Rate optimization tools:

Loyalty assessment is possible using the Net Promoter Score tool and the question "How likely is it that you will recommend our service to others?" Read about how to use this indicator correctly in the article.
Cohort Analysis, or cohort analysis. A cohort is a group of clients who came in within one month. The life of this group must be monitored on a monthly basis.

The entire audience must be divided into groups, depending on their goals when using the service. Thanks to this approach, it will be possible to segment customers into categories according to the duration of their life cycle.
Customer Satisfaction Index method.

Undoubtedly, retaining a person who already uses the services of the service is not as expensive as attracting a new one. The following guidelines will help you achieve less customer churn:

Communicate with your audience in an open format.
Use available channels feedback and e-mail notifications.
Answer questions through forms and widgets on the site.
Research your audience, research negative reviews and work with them.
Objectively evaluate the advantages and disadvantages of your product, compare it with competitors' analogues.
Do not use irrational solutions (new methods of work) and incomprehensible PR.

Since your product is intended for people, it is a good idea to test it with a small test group before implementation. Track the decisions your team makes and make adjustments as needed.

What is better to rely on in calculations: conversion, ROI or LTV

What are the best marketing metrics to focus on? According to some marketers, conversions need to be measured. Others think it's better to focus on ROI. Still others are sure - you should look at the LTV index.

All three metrics are important. Below we describe the features of each.

The table shows the calculation of the dynamics of the change in the cost of a conversion with an increase in the conversion itself, the calculation of the short-term ROI after the first month, the calculation of the LifeTime value, the accumulative ROI (over the entire life cycle of customers) and accumulative profit.

Note that some indicators can be diametrically opposed in different business areas. The main thing here is to analyze the possible ratios of indicators.

Conversion

The model is perhaps the simplest one. When talking about conversion, they often understand either the percentage of conversion (% conv) or its cost (CPx). By the percentage of conversion, you can track how fast a customer moves from one stage of the sales funnel to another. Based on the cost of conversion, the cost of promotion for one buyer is judged.

Pros of the conversion model

When specialists work on conversion, they try to optimize costs. As your conversion rate increases, your cost per conversion (CPx) goes down. That is, a big return with the previous investments is ensured.

Consider the information below:

The conversion model is very easy to calculate.
When you increase your conversion X times, you reduce its cost by the same amount. For example, with a conversion of 1%, CPx = $ 100. When the conversion doubles (from 1% to 2%), CPx is halved, that is, it will be $ 50. This is very important because you can get a lot more clients with the same budget. To improve conversion there are free ways(for example, optimizing the UX of certain website pages).
The cost of conversion decreases at a non-linear rate, slowing down at each subsequent step. For example, when your conversion rate increases from 1% to 1.25%, your CPx drops from $ 100 to $ 80.
The cost of optimization per consumer is $ 20. At the same time, when the conversion rises from 2% to 2.25%, CPx decreases from $ 50 to $ 44.4. The cost of optimization is $ 5.6.

With a high degree of probability, after a certain time, your CPx will freeze. To ensure that your audience continues to grow, you still need to have working capital to achieve marketing goals.

Cons of the conversion model

According to the conversion model, all conversions are the same. At the same time, it is far from the fact that when you buy customers from channels (campaigns) with a minimum CPx, you improve the quality of the customers you purchase.

Here are the basics to never forget:

Often (although not in all cases), a low CPx also means a low AMPU (Average Margin Per User). The buyer must be willing to purchase the product. If motivation is lacking, the marketer creates it. Thanks to discounts, bonuses, etc. conversion can increase significantly. But discounts and bonuses at the same time significantly reduce the company's profit from the first purchase of a client.

There is usually no direct correlation between a decrease in CPx and an increase in short-term ROI.

Above is a graph showing the decline in CPx. At the same time, short ROI decreases and increases. This is because different customers come from different channels (from different campaigns) who buy products of different types, qualities and prices.

Do not forget that about 40-60% of all customers are one-time buyers, and therefore it is better to calculate ROI after the first purchase (first month).

The conversion model can tackle the top-priority acquisition issues. At the same time, it does not take into account the buyer's life cycle at all. further stages following attraction.

Let's dwell on the LifeTime value model. Its concept is quite rational. You are not focusing on costs, but on the income that the client will bring you over the long term. Surely, you already understood that one purchase cannot be used to judge the success of investing in a channel (neither at the AMPU level, nor at the level of short-term ROI).

Pros of the LTV model

Thanks to LifeTime value, you will learn about the threshold rational value for assessing the maximum likely value of the consumer when buying it. Of course, spending more on a customer's purchase than the amount that he can bring you during his life cycle is irrational. In addition to losses, you will receive nothing in this case. In this regard, in SaaS one of the fundamental rules is the ratio: LTV> 3 x CAC.

You are focusing on the buyer's profit, therefore, you are thinking about increasing the profitability of your company in the near future and in the future.

It is clear from the graph that buyers with a conversion of 2.50%, 2.75% and 3.00% as a result bring customers whose LifeTime value is two to three times lower compared to customers with a conversion of 2.25%.

Cons of the LTV model

It's hard to calculate. The LTV model assumes the most accurate forecast of changes in three parameters - regularity and amount of repeat purchases, Gross Margin and Churn Rate. The main difficulty lies in the fact that all these components can change as long as the company exists. That is, they are not static.
Optimization based on the LTV model does not always bring the highest resulting profit (AccProfit).

The chart shows the profits of the various cohorts. Upon examination, it becomes clear that the highest income is in the two cohorts - in the cohort with the highest LTV (USD 476) and in the larger cohort with only the third largest LifeTime value (USD 208).

There are always few consumers who can bring the company the most income. If you rely solely on this category, your income will one day stop growing. You will not be able to continue to find the required number of profitable clients, that is, to develop at a given speed.

In this regard, using the LTV model, you should understand that after reaching the maximum number of profitable customers, you will have to pay attention to campaigns (channels) with not the maximum LTV. But there will be more opportunities for attracting new buyers.

Many startups today prefer to use the LTV / CAC metric, as it takes into account both revenue and expenses. It is more rational to use its analogue AccROI = LTV / CAC - 1. The formula demonstrates the interchangeability of indicators. However, for a 1.50% conversion, we get AccROI = -42%, with LTV / CAC = 0.58. That is, AccROI clearly focuses on unprofitable cohorts and reduces revenues, stimulating you to be even more productive.

The ROI model can be somewhere in between conversion models and LifeTime value. However, the ROI is still closer to the LTV model. Is the ROI always taken into account and ra?

The issue of calculating the lifetime value (aka LTV, customer lifetime value, CLV) sooner or later comes up before the developers of mobile (and not only) applications. There are many calculation methods, and there are as many people as there are opinions on how to calculate LTV. In this article, I decided to describe the most common methods, outline their pros and cons. These methods are suitable primarily for describing the f2p model.

1. After the fact
This method stands out against the background of all subsequent ones, since it does not simulate LTV and does not predict it, but calculates the actual LTV.
For this method, you need to take a cohort of users who have already definitely left the project, see how much money this whole cohort brought in, then divide this amount by the size of the cohort. It is desirable that users are registered at about the same time (in one month, or better - in one day).
In practice, however, this method is poorly applicable, since there will certainly be at least one person from the cohort who is still active, no matter how long the cohort has been registered. Therefore, in practice, LTV is simulated, and not calculated after the fact. And all subsequent methods will simulate the future LTV, and not evaluate the past.

2. Take everything and divide, or Sharikov's method

The fastest, but the most rude method. We take all the income of the application for a period and divide by the total number of users for the same period.

A plus this method has only one: it is calculated quite quickly, literally in one action.

Minus lies in the obvious inaccuracy of the method, which may be due, for example, to the following reasons:

income from those users who have already become active (included in the denominator), but have not yet managed to bring income (which would have entered the numerator) are not taken into account;
the calculation includes the values of the application's metrics from the very beginning of its life; Do not forget that applications have their own life cycle, and as a rule, at the beginning of their life cycle, performance is better than some time after (read an excellent study from GameAnalytics about this). In the same method, all stages of an application's life are combined.
also in this method it is difficult to calculate LTV separately for each user segment, for this you need to know in advance the size of the segment and the amount of money brought by users of this segment.

3. Lifetime in a simple way
If we know how many days a user lives in the application on average, and how much money he brings on average per day of his life, then we can estimate how much money he will bring in his entire life in the application. And this is our LTV. The formula for this method is:

Then the question arises of how to count lifetime. There are two methods, and the first is a simple calculation (as you might have noticed from the title):
1) We define a certain period of inactivity, that is, the time after which the user most likely will not return to the application. This is determined either on the basis of retention values, or, more often, expertly. Usually, expertly, this value is set equal to one or two weeks.
2) Every day we look at users who have expired on that particular day.
3) For each user, calculate the number of days from his first visit to the current day.
4) Calculate the average for all users. This is lifetime.

Well, ARPU (in this case ARPU = ARPDAU) is calculated as daily Revenue divided by DAU. We multiply lifetime by ARPU and get LTV.

pros method:

Simplicity of calculations. It is not difficult to calculate lifetime this way, it is even easier to calculate ARPU. And any student can multiply one by the other.
You can calculate LTV even every day.
LTV can be calculated for each user segment separately.

Minuses again consist in inaccuracy, which in this case is due to the following reasons:

The value strongly depends on the period of inactivity, which is set, as a rule, by experts.
We multiply the average lifetime by the average ARPU to get the cumulative error.
When calculating lifetime, we look at those users who have already left the application. When calculating ARPU, we look at the users of the current day. It turns out that the sets of users that form lifetime and ARPU do not overlap: lifetime is counted according to the data of previous days, ARPU - according to the current day.
Strong assumption about unchanged ARPU. We take ARPU for only one day and based on it, we predict LTV many days in advance.

4. Lifetime Hard, or Bottoms Up
The second name of this method is taken from the material of Wooga, and this, you see, is a source that is worth listening to. The formula for the method is exactly the same:

But lifetime is considered a little more complicated here and is much more accurate. Let's remember what the retention graph looks like:

The point is that lifetime is the area of the pattern under the retention chart, in other words, the integral of retention over time.
But before calculating the integral, it is necessary to construct the function itself. How it's done:
1) Typically, you have retention values for several days (for example, 1 day, 7 days, 28 days). If there is for other days, or even better - for longer periods of time - this is fine, it will only make the calculations more accurate.
2) Based on the known values (say, for 1, 7 and 28 days), we need to build a retention curve. We will look for an equation of the curve of the form:

where t is the number of days from the first visit, F (t) is the future retention equation, and A, B, and C are the coefficients of the model.
3) Substitute the known retention values, no matter how many, into the equation, and we get a system of equations for the coefficients A, B and C.
4) Calculate the sum of the squares of the differences in deviations between the actual and simulated values of F (t).
5) Find the values of A, B and C that minimize the total deviation. This can be done perfectly, for example, with the Solver tool in MS Excel.
6) Substitute the found values A, B, C into the equation and get a function with which you can estimate retention for as many days as you like.
That's not all, but we're getting close. Further, you can still choose a complex or simple method.
The tricky method is to find the integral of the retention function.
Recall that

A simple method is to, albeit approximately, divide the retention curve into segments depending on the lifetime value. For example, for users who left every other day, have lived in the application from 2 to 7 days, from 8 to 30 days, from 1 to 3 months, over 3 months. The more segments the better. For each segment, according to the retention table, calculate the percentage of users (segment weight) belonging to it, and then calculate the weighted average lifetime for all segments.

But whichever method you choose, you will be faced with the question up to what moment to calculate LTV (in the case of the integral, this will be the right edge of the integration area, in the case of the sum, the number of days in the very last segment). And here again there are two methods of solution: simple and complex.
A simple method is to set the right edge in an expert way. This usually happens like this:
- let's take six months!
- why?
- why not?
- well, let's get half a year.

The tricky method is to use discounting and find the WACC discount rate (admit, you didn't expect to see financial mathematics in this material?). The point is that a thousand dollars now and a thousand dollars tomorrow are different amounts of money. Tomorrow's thousand dollars today will be equal to nine hundred dollars or so, depending on the choice of the discount rate.
The formula is:

Here PV(present value) - the present value of future money,
CFi- money that you will receive in i time periods,
WACC(weighted average cost of capital) - the same discount rate.
How to find it? Typically, the WACC is set equal to the average firm's actual return on equity. You can also equate it to the desired return on equity, or to the return on equity of alternative projects. If you do not understand this paragraph, ask your financiers, they probably know the WACC of your company.
So, knowing the WACC, you will be able to discount future time flows, and therefore, choose at least infinity as the right edge of integration. The point is that adding WACC makes from your sum (or from your integral) an infinitely decreasing sequence for which you can find the sum.
Let's assume that we have counted lifetime. Now we calculate ARPU (Revenue / DAU), multiply ARPU by lifetime and get LTV.

pros method:

Accuracy. Lifetime is calculated very accurately, the error in it is minimal.
A side effect of calculating this method is that you also get a retention forecast for as many days as a bonus.
The ability to calculate LTV for each segment separately.

Minuses method:

Difficult to count (although an experienced analyst, given all the data, will calculate your LTV in five minutes).
Once again, the assumption about the invariability of ARPU in time. You can play it safe a little and take into account not ARPU for one day, but the average daily ARPU for a lifetime, this will increase the accuracy.

5. Cumulative ARPU, or Top Down
The second name of the method is again taken from the Wooga material, which gives +10 to the credibility of this method... The picture is taken from the same material:

Let us explain. Let's say a group of new players came to your project, and you began to follow it. You measure how much money an average player from this group brought you in 7 days, in 14, in 28, and so on. That is, in essence, you go from regular to cumulative ARPU in N days.
Well, knowing the Cumulative ARPU for 7, 14, 28, etc. days, we can again build a mathematical model of the curve that will predict the Cumulative ARPU values for as many days as we want. We will look for an equation of the curve of the form:

where t is the number of days from the first user visit, F (t) is the future equation, A and B are the coefficients of the model.
We again calculate the sum of the squares of the deviations and minimize it by selecting optimal values coefficients A and B.
If you have more Cumulative ARPU values (say, for 60 and 90 days), then you can add additional terms of the form C * t or D / t to the equation, this can improve accuracy. Well, in general - there is no one equation that is guaranteed to give the minimum deviation. Experiment with the kind of equation!
After a few iterations, you will still get the equation that suits you. Now, substituting the value of t you need into this equation, you get Cumulative ARPU (t), which in fact will be equal to LTV.
How to choose t value for LTV calculation?

So, we looked at five methods for calculating LTV, which, as you may have noticed, are ordered from least accurate to most accurate. Choose the method you like, calculate your LTV and make the right decisions. And now the main rule of LTV: divide users into segments, and count LTV of each segment separately. This will give you both higher accuracy and more reason to accept. correct decisions for your product.

Of all the SaaS metrics, the LTV index, or "customer lifecycle" ( lifetime value) is the biggest mystery to marketers. It is quite difficult to calculate it, but even if you succeed in it, it is not so easy to understand what to do with the result and how to evaluate it. Let's try to figure out what this metric is and how to use it.

LTV is the amount of money that you expect to receive from a particular client during the lifetime of his account in the active phase. Suppose the price for your company's services is $100 / month, and the client decides to work with you for 12 months. In this case, the LTV of this client will be equal to $ 100x12 = $ 1200.

Why is the LTV index needed?

In the cloud business, LTV is a measure of how much money you can spend on acquiring new customers. So, if the cost of attracting one customer, or CAC ( customer acquisition cost) is $ 100, and its life cycle was $ 500, then imagine that you would have printed 400 bucks. Not bad, huh?

The higher the LTV and the lower the CAC, the faster your profit grows.

However, things are not so simple. In general, the scheme is correct, but for the long term, such a calculation is not the most the best solution... If only because not all clients are the same.

First of all, you need to know the LTV for each segment of your users. In a SaaS company, these segments are usually determined based on the cost of the service package.

For example, Vladimir's LTV with his $ 30 / month tariff plan does not compare with the life cycle of Svetlana, who opted for a $ 200 / month package. And it's not just the price difference.

LTV and churn

The reason why customer lifecycles can vary significantly from one another is due to one other word: churn or churn... As a rule, users with low tariff plans are characterized by the highest churn values, which also requires attention when calculating LTV for each segment.

As stated earlier, LTV is a measure of how much money you can spend finding and acquiring new customers. So, if the average user costs you $ 200, then with an expected life cycle of $ 100, such costs do not make any sense.

In this regard, accounting for churn for each segment when calculating LTV is critical.

Formulas for calculating LTV

The basic method presented above for calculating the life cycle of a user, obviously, does not have much practical value for a real business (unless, of course, your company has more than one client).

Let's see the best way to calculate LTV:

LTV = ARPU x Average Lifetime of a Customer,

where ARPU is the average monthly income per client ( average monthly recurring revenue per user), and Average Lifetime of a Customer is the average duration of customers using your company's services, which in turn is calculated by the formula:

Average Lifetime of a Customer = 1 / churn rate, i.e.

LTV = ARPU / User Churn

The higher your customer churn rate, the lower your final LTV will be. Thus, when calculating profit, both metrics are critical.

High conversions for you!

Internet marketers agree that a number of metrics can be used to analyze an eCommerce business, but the most important is LTV (Lifetime Value). LTV displays the profit that the consumer brings over the entire life of the firm's services. If a client spends $ 300 a year for five years, then LTV for this period of time is $ 1,500.

LTV (also called CLV - Customer Lifetime Value) is a suitable metric for analytics of both online stores and SaaS. This indicator is much more significant than the rest, since other KPIs are influenced by changes in the type of fluctuations in user demand. main feature LTV is that it focuses specifically on long-term customer value. The metric allows you to assess the overall performance of the business, taking into account both positive and negative changes.

One of the fans of LTV is the renowned web analyst and marketer Avinash Kaushik. In his opinion, the correct definition of LTV is a work to achieve success, it allows you to identify consumers who have value for the company, and also makes it possible to solve future problems at the current time. The consumer life cycle has five main points:

Business awareness;
Comparison and evaluation;
Consideration and interest in buying;
Registration of the transaction;
Loyalty.

What does this cycle include in terms of business? First of all, this is strategy and marketing, as well as attracting audience attention, user experience, customer service, the product itself, sales organization and decision-making. These factors have a significant impact on the viability of the enterprise as a whole. The conclusion suggests itself: LTV affects almost all aspects of work, and an increase in LTV necessarily entails an increase in profits.

The book Marketing Metrics provides some interesting statistics. Sales to potential clients make up a modest 5-20%, while sales to current clients make up 60-70%. Thus, focusing on customers is focusing on strategies that generate high net worth.

An excerpt from a popular BigCommerce article reads: “It's important to get customers to repeat business more frequently to generate more revenue. In other words, churn should be as low as possible so that consumers are constantly making more and more purchases. The low churn rate allows for higher LTV and makes the business more viable. "

How to calculate LTV for an online store?

There are a lot of formulas for calculating the LTV indicator, and each type of business uses its own calculation method. An online store differs from a subscription in that it can be difficult for an online store owner to understand whether a customer will place an order again. The data obtained cannot be considered accurate, they are very approximate and very averaged, perhaps this LTV formula will have to be modified for your niche.

LTV = AMPU / Churn rate

AMPU (Average Margin Per User) - average profit per buyer. Calculated for a period that you set yourself. It can be a month, quarter, year, several years.

Churn rate is an indicator of customer churn. It is calculated like this:

Churn rate = Departed clients for the period / Active clients for the previous period

Moreover, active customers are those customers who have not had more than a certain amount of time since the last purchase. For example, in a food delivery service, an active customer is one who places an order at least once every 2 months. If 2 months have passed, and the client has not made any more orders, we can consider him gone. But in furniture store purchases are made less often. There the client can be active years without shopping.

Ways to increase LTV

The main strategy for increasing customer lifetime value for conventional online stores will be the augmentation technique that we wrote about earlier. But there are other good, actionable methods to consider.

Cross-selling and upselling

Upselling to existing customers is not only a high probability of success, but also an increase in LTV. Neil Patel provides an example of how a tax preparer was able to increase the value of the consumer life cycle fivefold by upselling some value-added services.

We can say that upselling in the field of e-commerce is analogous to the gas pedal of a car. The harder they press on it, the faster it will be possible to get to the final point. Of course, the desired level of profit can be achieved without upselling, but much more time will have to be spent.

The graph shows how upsells positively affect the profitability of a SaaS business, while accelerating its development, and helping to achieve the required level of profitability. The principles that are used to ensure effective upselling for cloud businesses are relevant to any eCommerce niche, including online stores.

Obviously, cross-selling and upselling generate far more benefits than selling to prospective buyers. You just need to correctly apply the technique in practice, and the results will not be long in coming. Clients need to be attracted to repeat trades, not expect them to do them themselves.

Customer service

A report from the Harvard Business School found that a 5% increase in customer retention could lead to a 25-95% increase in profit margins. An increase in the retention rate has a positive effect on life cycle values. Obviously, the longer a consumer is in the status of a client, the more significant profits he can bring. If there is any secret way to retain customers, then the owners of Disney parks probably know it, the return rate of which reaches 70%. If he speaks in the dry language of marketing, the reason for the large number of return visits to Disneylands is that the parks are always working for customer satisfaction, constantly optimizing their work and the services they offer. Satisfied customers automatically become regular customers.

Patel identified several straightforward ways to increase LTV by providing high quality customer service:

All customer inquiries and calls must be answered;
The priority should be not quantity, but quality;
To increase authority, you need to publish content;
One must always be ready to do much more than the client can expect;
It is imperative to communicate with clients in a positive tone;
Customer loyalty should be rewarded with discounts or bonuses;
It is important to be patient with angry clients;
In the process of communicating with a client, you need to learn as much as possible about him.

LTV is not only about increasing profits, but it also helps build relationships. Customers who are well treated will feel good about the business. From a marketing perspective, the value of satisfied customers cannot be overstated.

The subscription model is an effective means of increasing LTV

The most effective way to increase LTV is to turn the product into a subscription service. Practice shows that in this way you can achieve stable profits, as well as get customers with a much longer life cycle. We can say that a business that operates according to the classic eCommerce model attracts customers with unpredictable and unstable LTV. At the same time, the company that offers receives an increasing influx of profits.

Subscription sales have been in high demand among some stores for years. For example, Dollar Shave Club sells shaving machines that way. A traditional online store is a catalog through which each customer can select a product, pay for it and wait for delivery. The subscription model works well with products that consumers buy regularly and in approximately the same quantities. These can be diapers, pet food, contact lenses, guitar strings, medications, etc. Of course, this model is suitable for a very small number of online stores. But it will definitely provide additional ideas.

How the sale of a product by subscription works:

The client purchases a subscription for a long period (six months, a year) and receives goods with delivery according to the established schedule.
The entire period, all consignments of goods are paid immediately.
The client receives the ordered goods at home at regular intervals.
Subscription products have a lower cost due to the fact that the seller negotiates with suppliers to reduce the cost by ordering a large batch of goods, motivating the supplier to pay in advance.
As a result, the buyer receives goods at a favorable cost, which will be delivered to him at the required frequency.

Key benefits of a subscription:

You don't need a lot of financial resources to launch a subscription.
Deliveries of goods begin only after receipt of payment, that is, the risk of being deceived is minimized.
The seller knows for sure how much of the product he should buy or order from the supplier.
A subscription can have elements of a surprise or a game, which will appeal to people who love gifts and surprises. In the west, there are subscriptions for toys for children, gifts for the holidays.

The subscription model itself is hardly new. We are accustomed to subscribing to magazines and newspapers, television channels, purchasing subscriptions to gyms, etc. The number of goods that can be bought under such a scheme is constantly growing, since this format of cooperation is beneficial for both the seller and the buyer. The latter receives the necessary goods without leaving home, which is of great importance, given the continuous growth of employment.