Why are LTV metrics critical and how do you work with them?

Article 10/34 about #productmanagement with a focus on Hard skills.

In the world of product management, LTV (Lifetime Value, or customer lifetime value) is one of the most important metrics that determine the long-term sustainability and success of a business. LTV measures how much money one customer will bring in on average over the entire time they interact with your product or service. Understanding and optimizing LTV can significantly improve strategic planning, marketing, and your company’s overall business model. Let’s understand how to work with this metric and why it’s so important.

Why LTV is important.

1. Optimizing your marketing spend: By knowing LTV, you can more accurately determine how much to invest in attracting new customers without risking spending more than they’ll bring you in the future.
2. Focus on retention: LTV emphasizes the importance of not only attracting new customers, but also retaining existing customers, as increasing retention is often a more effective way to increase overall profitability.
3. 3. Understanding your target audience: Analyzing LTV across different customer segments helps you identify the groups most valuable to your business and tailor your product or marketing strategies to meet their needs.

How to calculate LTV?

The LTV formula may vary depending on the business model, but the basic principle is as follows:

LTV = Average receipt Number of purchases per period Customer’s lifetime

For subscription services, the formula may look like this:

LTV = Average monthly subscription * Customer retention period (in months)

Let’s look at a detailed example of calculating LTV (Lifetime Value) for a digital product, for example, for a subscription-type mobile application offering educational content.

Initial data:

Average Monthly Subscription (AMS): $10 Average Customer Retention Period (ACL): 2 years (24 months) Average Retention Rate (RR): 70% per year The cost of attracting a customer (Customer Acquisition Cost, CAC): $30

Calculation:

Calculation of LTV through average monthly subscription and retention period:

LTV=AMS×ACL

LTV = $10 × times 24 = $240

This means that one customer brings in an average of $240 during their “lifecycle” in the application.

Calculation of LTV taking into account retention:

If you take into account retention, the calculation becomes more difficult, since you need to take into account that not all customers stay for the entire period. To simplify, let’s assume that retention affects the number of active users linearly, and at the end of each year, the number of active users decreases by (100% — RR).

LTVadjusted=AMS×∑n=1ACLRR(n?1)/12LTVadjusted=AMS×∑n=1ACLRR(n?1)/12

Let’s assume that retention affects evenly throughout the year, then after the first year we have 70% of users, after the second — 49% (70% of 70%).

LTV_{adjusted} = $10 \times (12 + 12 \times 0.7) = $10 \times 20.4 = $204

Thus, taking into account the deduction, the LTV is $204.

Calculation of LTV taking into account CAC:

To understand the real value of a client, you also need to subtract the cost of attracting him:

LTV=LTV?CAC

LTV = $204 — $30 = $174

This means that the net lifetime value of one client after deducting the cost of attraction is $174.

Practical examples

1. Netflix: One of the most striking examples of using LTV is Netflix’s content marketing and customer retention strategy. Netflix is investing billions in the creation of original content, hoping that this will increase the retention period of subscribers and, accordingly, their LTV.

2. Amazon Prime: Amazon uses LTV to determine the value of the Prime offer. Realizing that Prime users spend more on average than regular users, Amazon is actively investing in expanding Prime privileges to increase retention and increase LTV.

How to increase LTV?

Increasing customer lifetime value (LTV) in a digital product is a strategic challenge that requires an integrated approach. It involves improving the product, optimizing user interactions, and effective data management. Here are some strategies with examples of how you can increase LTV:

1. Personalize the interaction

Example: Netflix uses machine learning algorithms to analyze user preferences and offers personalized content recommendations. This increases user satisfaction and encourages users to return to the service more often, which increases LTV.

2. Improving product quality and user experience

Example: Slack is constantly rolling out new features and improvements based on feedback from users. This not only increases customer satisfaction, but also makes the product more competitive, increasing LTV through user retention.

3. Loyalty and rewards programs

Example: Starbucks uses a mobile app to manage a loyalty program, offering customers bonuses and special offers. This incentivizes repeat purchases and increases LTV.

4. Regular content updates

Example: HubSpot provides an extensive library of educational content and resources that is regularly updated. This entices users to return to the site, increasing engagement and LTV.

5- Effective customer support

Example: Zappos is known for its high level of customer service, including fast and efficient processing of returns and exchanges. This increases customer trust and loyalty, helping to increase LTV.

6. Leverage feedback from users

Example: Airbnb actively collects feedback from both renters and landlords to improve service and offerings. This helps optimize user experience and increase LTV by improving customer satisfaction.

7. Develop additional features and services

Example: Adobe moved from a one-time software sale to a subscription model (Adobe Creative Cloud), offering regular updates and additional online services. This increased LTV by providing ongoing value to subscribers.

8. Building a community around the product

Example: Fitbit develops a community of users who can share their achievements, participate in competitions and support each other. This builds brand loyalty and increases LTV.

What are some of the causes of low LTV?

A customer’s low LTV (Lifetime Value) can be caused by a number of factors that affect a customer’s interaction with a product or service. Here are some of the most common causes:

1. Poor product or service quality: If a product does not meet customer expectations or is inferior to competitors’ products in terms of quality, it can lead to loss of interest and customer abandonment
2. Poor user experience: A complicated interface, frequent product errors or malfunctions, and lack of ease of use can drive users away.
3. Lack of attention to customer retention: Lack of effective loyalty programs, personalized offers and promotions for loyal customers reduces interest in continuing to use the product.
4. Poor customer support: Slow or ineffective support service can exacerbate customer problems, leading to customer dissatisfaction and abandonment.
5. Inappropriate pricing policy: Too high prices compared to competitors or insufficiently transparent tariff system can discourage potential and existing customers.
6. Lack of innovation: A product’s inability to evolve and adapt to changing market demands and user needs can lead to a decrease in its value in the eyes of customers.
7. Lack of marketing activity: Ineffective product promotion and lack of active communication with the target audience reduce brand recognition and product appeal.
8. Misunderstanding of the target audience: Failure to meet the expectations and needs of the target audience leads to low levels of customer engagement and loyalty.
9. High competition: In a highly competitive environment, customers can easily find alternative solutions with better value for money, which also affects LTV.
10. Lack of personalization: The inability to offer customers a customized approach and personalized offers reduces customer engagement and interest in the product.

Conclusion:

Dealing with LTV metrics requires constant analysis and readiness for changes in product and marketing strategy. However, understanding and optimizing LTV opens the door to sustainable growth and success for a company, making investments more informed and effective. Implementing strategies to increase LTV will not only help improve financial performance, but will also help you better understand your customers, creating products they will love and use for years to come.