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What are the most effective ways to determine the lifetime value of a customer?

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Knowing the lifetime value of a customer (LTV) is crucial for any technical sales professional, especially when selling enterprise resource planning (ERP) software. LTV is the total revenue that a customer generates for your business over their entire relationship with you. It helps you optimize your pricing, marketing, and retention strategies, and measure your return on investment (ROI). But how do you calculate and improve LTV? Here are some of the most effective ways to determine the lifetime value of a customer.

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Haris Halkic

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Robert Juul Glaesel

Strategic Sales Director @Monta | Sales Leadership
Gerard Campillo Madrid

Ayudo a las empresas en lo más importante, las personas. En Starda ofrecemos tecnología y servicios para llevar a las…

1 Use a simple formula

One of the easiest ways to estimate LTV is to use a simple formula that multiplies the average revenue per customer (ARPC) by the average customer lifespan (ACL). ARPC is the total revenue divided by the number of customers, and ACL is the average time that a customer stays with your business. For example, if your ARPC is $10,000 and your ACL is 5 years, your LTV is $50,000. This formula gives you a rough idea of how much each customer is worth to you, but it does not account for factors like customer acquisition costs (CAC), discount rates, or churn rates.

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Haris Halkic

Helping 9,521 sales pros level up with my newsletters → Subscribe here ????
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?? Imagine you have a lemonade stand, and you want to know how much money you'll make from one customer over time. → Average lemonade price: Let's say you sell lemonade for $2 each, on average. → How often they buy: Some customers come every day, some every week, and some once a month. On average, let's say they buy a glass of lemonade every week → How long they stay loyal: Think about how long you think a person will keep coming to your lemonade stand. Maybe a year? Now, we do some math: $2 (average price) × 1 (how often they buy in a week) × 52 (how long they stay loyal in weeks) = $104 So, one customer is like a cool $104/year! Now, you can decide how to make them even happier and keep coming back for more lemonade and fun! ????

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Robert Juul Glaesel

Strategic Sales Director @Monta | Sales Leadership
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Create Cohorts, otherwise you will always have a moving target. Average lifetime revenue per customer multiplied with the time you have them is your Customer lifetime value. It sounds easy but it can be deceptively hard to calculate depending on the complexity of your product, so make sure you simplify the calculation to a point where you can use it to make better decisions in your company.

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2 Use a cohort analysis

A more accurate way to calculate LTV is to use a cohort analysis, which groups customers based on their behavior, characteristics, or purchase dates. For example, you can segment your customers by the type of ERP software they bought, the size of their business, or the month they signed up. Then, you can track the revenue and retention of each cohort over time, and compare their performance. This way, you can identify which cohorts have the highest LTV, and tailor your sales and marketing efforts accordingly.

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Gerard Campillo Madrid

Ayudo a las empresas en lo más importante, las personas. En Starda ofrecemos tecnología y servicios para llevar a las empresas y las personas a otro nivel. #HR #HCM #HXM
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Los análisis de cohortes son poco utilizados por la complejidad de realizarlos pero nos dan una gran información sobre todo en productos de software dónde el mercado se mueve de forma muy rápida. En productos con grandes costes de cambio quizás no es tan importante pero nos permitirá ver las tendencias y hacer buenas proyeccciones. En cambio, en productos con bajas barreras de cambio y mucho movimiento entre productos de softwares similares nos hará conocer de forma efectiva el LTV de nuestros clientes.

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3 Use a predictive model

A more advanced way to determine LTV is to use a predictive model, which uses historical data and machine learning to forecast future revenue and behavior of customers. For example, you can use a regression model, a decision tree, or a neural network to predict how long a customer will stay with you, how much they will spend, and how likely they are to churn. This way, you can optimize your pricing, upselling, and cross-selling strategies, and target your most valuable customers.

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Robert Juul Glaesel

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This will confuse things. Lifetime value should not be based on any forecasts. If you add prediction into the model then you need to make sure it is clearly stated. Predicted LTV can take in predictions as data points, but LTV needs to be based on historic numbers. Both numbers should be known and used, for different things.

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4 Use feedback and surveys

Another effective way to determine LTV is to use feedback and surveys, which allow you to understand your customers' needs, preferences, and satisfaction. For example, you can use Net Promoter Score (NPS), Customer Satisfaction Score (CSAT), or Customer Effort Score (CES) to measure how loyal, happy, and engaged your customers are. You can also ask them about their challenges, goals, and expectations from your ERP software. This way, you can improve your product, service, and support quality, and increase your customer retention and referrals.

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Gerard Campillo Madrid

Ayudo a las empresas en lo más importante, las personas. En Starda ofrecemos tecnología y servicios para llevar a las empresas y las personas a otro nivel. #HR #HCM #HXM
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Pedir feedback y hacer encuestas nos permitirá hacer buenas proyecciones. En una gran empresa de software en la que trabajaba éramos capaces de predecir el número de upsells y de bajas con gran acierto a partir de las encuestas de NPS, el número de llamadas a customer services así como la puntuación de la llamada en cuestión.

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5 Use experiments and tests

A final way to determine LTV is to use experiments and tests, which enable you to measure the impact of different variables on your customer behavior and revenue. For example, you can use A/B testing, multivariate testing, or split testing to compare different versions of your website, landing page, or email campaign. You can also use price testing, value proposition testing, or offer testing to test different pricing models, features, or benefits of your ERP software. This way, you can optimize your conversion, retention, and revenue rates, and maximize your LTV.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the most effective ways to determine the lifetime value of a customer?

1

2

3

4

5

6

1 Use a simple formula

2 Use a cohort analysis

3 Use a predictive model

4 Use feedback and surveys

5 Use experiments and tests

6 Here’s what else to consider

Technical Sales

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What are the most effective ways to determine the lifetime value of a customer?

1

2

3

4

5

6

1 Use a simple formula

2 Use a cohort analysis

3 Use a predictive model

4 Use feedback and surveys

5 Use experiments and tests

6 Here’s what else to consider

Technical Sales

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