What is a Customer LTV and Why It's Critical to Improve it

​When you are running a business, you have so many KPIs (key performance indicators) you have to monitor: sales close rate, conversion rate, CAC, click through rate, satisfaction rate, average revenue per unit, retention rate, and so on. One KPI that is often ignored or simply unknown is the customer LTV or customer lifetime value.

According to Hubspot, customer lifetime value is the metric that indicates the total revenue a business can reasonably expect from a single customer account. It considers a customer's revenue value, and compares that number to the company's predicted customer lifespan. In terms of your business, how much revenue does each customer generate annually and how long does a typically customer stay with you. For example, Customer A is a SMB client that pays you on average $2000 in annual revenue and they stay with you for 5 years. The lifetime value or LTV of customer A is: $2000 x 5 = $10,000 For a lifetime value (LTV) of $10,000

A different example, Customer B is an enterprise client and pays $20,000 per month, and also added an ancillary service for $1000 per month. The customer stays with you for 3 years. The LTV on customer B is: $(20,000 + $1000) x 36 = $756,000

For a total LTV of $756,000 You would want to do this for all of your customers so you can come up with an average customer LTV for your business. So why is it important to know your business's average customer LTV? If your goal is to grow your business, it’s critical to increase the LTV of each customer. Increasing the customer LTV provides consistent and sustainable growth and more profit. It’s not just about bringing in new customers, but also increasing the LTV of these new customers and your existing ones. So how do you increase the customer LTV for your business? Remember the two main components of LTV:

1. The average annual revenue a customer generates

2. The length of time a customer stays with you

The simplest way to increase your LTV is to drive up both components. Here are 4 tips to increase your customer LTV. Tip One: Cross-sell Cross-selling drives two major factors for LTV.

1. It increases the average revenue per customer. Each additional product and service generates more revenue

2. The more products your customer has with you, the more likely they will stay with you.

Think of every major bank you deal with. Their goal is to sell you every product they have. If you just have a checking account, it’s easy to leave them. But if you have checking, savings, loans and a mortgage, the chances of you taking all of your business somewhere else reduces dramatically. Step Two: Increase customer satisfaction According to HubSpot research, 55% of growing companies believe it's "very important" to invest in customer service programs. In comparison, companies with stagnant or decreasing revenue, only 29% said this investment was "very important." Increasing customer satisfaction can be accomplished in a few ways:

• Listen to your customer: You can’t give customers what they want until you know what they want. Listening to them allows you to better understand their needs and how to provide it to them.

• Proactive customer service: Engage your customers regularly. Identify potential challenges and opportunities, such as, major changes in business, leadership, addition of new locations, change in ownership, new technology, etc.

• Resolve issues promptly and honestly: When an issue does arise, resolve it urgently. Be honest with your customer and avoid the blame game.

• Under promise and over deliver: In this age of hype and over exposure, the old adage of under promising and over delivering holds true more than ever. Don’t oversell products or your capabilities. Do find ways to over deliver service to delight your customers.

• The platinum rule: Treat them like how THEY want to be treated. Get to know your customers and learn what’s important to them

Step Three: Increase customer retention Acquiring a new customer is much more expensive than retaining one. In an article published by Harvard Business Review, gaining a customer can cost as much as 25 times more than retaining an existing one. In addition, a Bain & Company study showed a simple 5% increase in retention rate can lead to an increase in profit between 25% to 95%. Step Four: Additional products or services Consider adding complementary products or services as part of your overall product suite. HR, time and labor, insurance, consulting, recruiting services are some of the products you may consider. You can develop expertise in house, hire, partner, or even white label to add some additional services. You can become a one-stop shop for all of your clients needs. Bottom line, gaining insight into your customer LTV and developing strategies to increase it will help drive more e revenue and profit for your business. Invest in the time to calculate your customer LTV and follow through on your strategies. You can utilize the tips above as a starting point. If you need additional help, consider signing up for our consulting program. Either way, investing in improving your customer LTV will help you create loyal long term customers that buy more from you which ultimately translates to a consistently growing and profitable business.