Having complete control over all the indicators that, in some way, reflect a company’s financial results is crucial. After all, understanding each metric in depth will help pinpoint bottlenecks and work more effectively to resolve them. One such indicator is **lifetime value**, a concept we’ll cover in this article, and it’s super important.
Broadly speaking, lifetime value helps a company understand how much and for how long its customers typically spend. It shows the customer’s “lifecycle” with your company. If properly evaluated, lifetime value allows you to diagnose how useful your company is to the customer – and thus, work on ways to strengthen that bond.
As we’ll show throughout this article, this indicator’s main objective is to find ways to build customer loyalty.
Despite the somewhat fancy name, lifetime value is calculated simply. However, it requires the company to have an organized database and constantly verify its numbers. After all, business and customers can change relatively frequently, and outdated number analysis can potentially present skewed – and therefore ineffective – results.
What is Lifetime Value?
Lifetime value, also known as LTV, is a metric used in sales to calculate the value of a customer’s lifecycle with a brand or company. In other words, it’s the sum of all values spent by the customer during the period they actively did business with your company.
This measurement is crucial because it can provide effective answers about your customer base and how they view their relationship with you. After all, it demonstrates how long your company is actually useful in solving a customer’s problem.
Knowing the lifetime value immediately provides two important pieces of information: how much a customer spends and how long they remain loyal to the brand. Since this is based on data gathered from the entire customer portfolio, you get a reliable snapshot of your business.
Another important point about calculating lifetime value is that it allows you to understand the cost of a customer – how much you’re willing to invest in them. This isn’t about customer acquisition cost (CAC), which we’ll discuss later, but rather the relationship with the return they provide.
This information is important for marketing and sales teams to work on strategies that improve customer retention.
While seeking leads and acquiring new customers is a goal that should always be on the horizon, retaining existing customers is essential.
This is because, whenever you have a solid customer base, ensuring the company’s financial health becomes relatively easier. Furthermore, several studies have shown that it’s much easier to retain existing customers than to acquire new ones.
The Importance of Lifetime Value
As mentioned, LTV is a critical metric because it tells us how much a customer typically spends throughout their entire business cycle with the company.
This data is fundamental for maintaining a financially healthy company.
By knowing how much return your customer usually brings, the marketing team, for example, will know how much is worth investing in them.
After all, there’s no point in spending X amount to consolidate a sale if, throughout the customer’s entire lifecycle, they don’t provide a return beyond that.
The same applies to the sales department. By knowing how much the customer, on average, returns, the sales consultant can establish strategies based on the profit each deal yields. Thus, reflected throughout the entire lifetime value, you can know with greater precision how much you can concede.
One of the sectors most impacted by LTV is Software as a Service (SaaS). This indicator is especially important in this segment because, often, offering the service only becomes profitable if the company can maintain a minimum customer base every month.
Imagine, for example, a software offering on demand. It requires the company offering the program to have a robust hosting infrastructure that ensures quality even with high traffic demand. For this, they need a team dedicated full-time to monitoring the service and able to correct failures as quickly as possible.
All of this, of course, requires a cost that a single customer would take many months or even years to cover – but that is significantly reduced if the customer base is large and they remain active for a certain period. That’s why knowing LTV is crucial for SaaS companies.
What Exactly is SaaS?
Software as a Service (SaaS) is a way of offering software or other technology solutions over the internet, like a service. In other words, instead of the customer having to install programs or even hardware in their own company, they simply purchase the service and use it over the internet.
SaaS is also known by other names, like on-demand software, hosted software, or web-based software. So, if you come across any of these definitions, know that the objective is the same.
This type of service is a great option for both sides, which is why it has been showing growth in the B2B business environment. After all, with technology and automation becoming increasingly present, no large company can do without programs that streamline all kinds of services. And having someone provide solutions without the need to invest in equipment and labor makes a big difference.
So, on one hand, SaaS is good for the provider because it allows them to sell the service to a large customer base, already having all the means to do so.
On the other hand, it’s great for the purchaser. The customer has a reduced initial cost compared to the “traditional” method, since they don’t need to invest in equipment or installation. Moreover, because it’s done over the internet, it can be accessed from anywhere.
Finally, service upgrades or updates are done remotely, quickly, and simply, without the need to schedule appointments with technicians.
Important Indicators for Lifetime Value
Whether in SaaS companies or any other type of business, knowing LTV is increasingly fundamental for planning next steps.
To arrive at the number, some indicators are crucial. They may be needed in isolation or as a comparison item, as they will allow the sales analyst or company manager to act more assertively when defining strategies.
Next, we’ll present three indicators that every company should consider, which will help you better understand your lifetime value.
Churn Rate
Churn rate, also known as attrition rate or cancellation rate, is the metric that calculates how many customers have stopped doing business with your company.
In many cases, this data is crucial, especially in those involving negotiations with other companies. After all, when it comes to B2B business, which represents high financial and product volume, a cancellation can have a significant impact on revenue.
Among the most common cases where churn rate always needs to be calculated is SaaS, since a sudden drop in the customer base can make the overall service offering unviable. That’s why companies operating in this segment need to have a high control capacity.
When it comes to lifetime value, the higher the churn rate, the worse the LTV result. This metric isn’t directly used in the calculation formula – which we’ll show later – but it affects one of the factors.
Because of this, more than considering it just as a calculation item, churn rate is important to evaluate in isolation as well, to use as a comparison.
Customer Acquisition Cost (CAC)
This data shows how much the company invests to acquire new customers. It’s calculated by considering all the work involved in the sales funnel, from lead identification and acquisition to closing the deal.
Here’s a practical example: If your company invested $1,000 in direct customer acquisition actions – whether through marketing efforts, cold calling, in-person visits, etc. – and at the end of the campaign gained ten new customers, your customer acquisition cost was $100 per customer.
To know the CAC, however, you need to have control over all sales stages. This will help determine how much investment each phase of the funnel requires and what its return is. This way, it will be easier to make adjustments and reduce this cost.
As you can imagine, under no circumstances should the CAC be higher than the LTV, or even close to it. After all, in the first case it means a loss, and in the second, low profitability.
Average Revenue Per User (ARPU)
ARPU represents the average revenue generated per user or unit over a specific period. It serves as a performance indicator, allowing you to assess whether the sales team has been able to close deals that are advantageous for the company.
Simply put, to calculate ARPU, you need to divide total sales in a given period by the number of customers who made purchases.
The higher the ARPU, the better the revenue performance.
Similarly, this data has a direct impact on lifetime value. When ARPU goes up, LTV also increases.
As with churn rate, it’s important to always evaluate ARPU in isolation. After all, outlier values will impact the final calculation, which could skew the analysis.
How to Calculate Lifetime Value?
The LTV calculation is based on the average recorded across a company’s entire customer base – after all, in the vast majority of cases, it’s impossible to do this for each customer, given the size of the database.
To arrive at LTV, you’ll need to gather three pieces of data beforehand: ARPU, purchase frequency per year, and average customer lifespan.
As you can see, these three numbers require prior research and tend to change periodically. Therefore, one initial tip is to compile these numbers from time to time.
With this data in hand, the calculation itself is relatively simple. Just plug the three values into the lifetime value formula, which is essentially a multiplication of the three factors:
LTV = ARPU x Purchase Frequency x Average Customer Lifespan
To make it clearer, let’s look at an example.
Imagine a Software as a Service company that offers its product through a monthly subscription. The monthly fee is $50. If the customer stays with the service for a year, there will be 12 transactions during that period. But you’ve determined from your database that, generally, a customer uses the service for three years.
Plugging the data into the formula, we have LTV = $50 (ARPU) x 12 (purchase frequency) x 3 (average customer lifespan). Therefore, the lifetime value is $1,800.
This means that, on average, each customer of your company spends $1,800 during the period they do business with you.
How to Increase LTV?
Like everything related to marketing and sales, increasing customer lifecycle involves applying good methods and strategies. There’s no single rule, but following some tips and maintaining good relationship practices tends to bring positive results.
Below, we list strategies that, if applied well, usually yield results not only for lifetime value but also for improving other sales metrics.
Contact Protagnst to learn how we can assist in your B2B client acquisition process.
Invest in Content Marketing
You’ve probably seen this tip in other Protagnst articles. The reason is simple: in addition to capturing leads organically, content marketing is a great way to engage and retain customers.
When it comes to lifetime value, retention is key.
One way to keep your customers with you is to give them good reasons to stay. By producing relevant content, in a way that makes them want to engage with what your company offers, you demonstrate that you have much more to offer.
One of the advantages of content marketing is that it’s relevant for companies of all sizes and segments. Widely used in B2C relationships, it also shows results in B2B.
Imagine, for example, producing relevant material for managers and purchasing decision-makers in companies you already do business with. Even if it’s not the ideal time for new sales, offering texts, videos, and images via email, invitations to read new articles on your blog, or posting content of interest on social media will keep you on their radar.
Build Customer Loyalty
We’ve already touched on this in the previous section, but it bears repeating: lifetime value is, at its core, customer loyalty.
Developing loyalty strategies is crucial, so it’s important that this is part of your company culture.
Retaining a customer for a long time requires understanding that they need to be cared for at all touchpoints and throughout their entire buying journey. Thinking about marketing, pre-sales, and post-sales strategies aimed at keeping that customer by your side makes it possible to achieve a higher lifetime value.
Customer Success
Not everyone is familiar with this term. It’s not a department or a job title – although some companies invest in customer success managers or even build a team dedicated to this – but rather something inherent in the company’s way of operating.
Satisfied customers are likely to do more business with the same company. And to feel satisfied, they need to receive at least everything they expected. Being positively surprised by receiving something extra is the icing on the cake.
Therefore, investing in post-sales, staying in touch, seeking feedback on the purchased product or service, and, above all, being available to correct any failures, are the foundations for good customer success practices.
At the same time, it’s a good way to increase lifetime value.
Excel at Customer Service
Good customer service is the bare minimum any customer expects before closing a deal, right? After all, even in everyday purchases, no one feels comfortable if the salesperson shows disinterest or isn’t courteous.
But increasing lifetime value involves offering good customer service *after* the sale is finalized as well. Making yourself available to answer future questions and resolve any problems isn’t a differentiator anymore; it’s an increasingly common practice.
Training your team to always offer the best customer service significantly helps increase LTV.
Offer a Loyalty Program
If you frequently travel by plane, you’re probably a member of at least one frequent flyer program, right? After all, it’s a simple way to ensure that a future trip will be cheaper – sometimes even “free.”
You might also have a plan for mobile data and calls that’s cheaper than the standard price. All you had to do was agree to the loyalty contract offered by the carrier.
Both cases are simple examples of a win-win relationship. The obvious advantage for the customer is the lower cost. For the company, it’s the guarantee that they’ll retain that customer at least for the duration of the loyalty program.
Invest in Innovation
Digital transformation is increasingly present, and we’re constantly surprised by new ways to use a particular product or service.
The concept of SaaS itself, which we discussed earlier, is an example of this. Not long ago, accessing software required purchasing physical media and installing it on your own equipment, often with very expensive configurations. Today, you get the same result with a single smartphone.
Therefore, being aware of transformations and being open to innovation is a great way to increase lifetime value. We’ve said repeatedly that LTV is about customer retention, and that means talking not just about the present, but also the future.
Final Considerations
Those who work in sales know that acquiring new customers isn’t the easiest task. It requires a joint effort, especially from the marketing team. After all, you need to identify leads, qualify them, approach them, and convince them that you have the best solution for them. Only then can you close a deal.
While it’s difficult to win new customers, keeping existing ones loyal is a slightly simpler task. But this, of course, depends on the customer having a positive experience. If they were satisfied with the product or service they purchased and were well attended to, the chances of them increasing their purchases or continuing to do business with you in the future greatly increase.
Obviously, the length of time a customer does business with a company can vary compared to another. But it’s always possible to calculate an average – and if it’s supported by a robust database, it will provide a result that closely reflects that customer’s “lifecycle.”
This cycle is what, in the sales world, we call lifetime value. It’s a fundamental metric for knowing how much and for how long a customer typically provides a return to the company.
Knowing this indicator is a great way to better understand your own company – and thus, establish conditions to retain those who already do business with you for longer.
Hire B2B Sales Consulting
Want to expand your customer base and business with existing clients?
Protagnst specializes in lead generation, customer acquisition, and sales consulting for business-to-business transactions. Fill out the form below, tell us a little about yourself, and together we can create the best strategy for your business.