LTV: How to improve lifetime value
Lifetime value (LTV) is a measure of how valuable each customer is to the business over their time as a customer. To increase their LTV, businesses must address the factors that contribute to LTV such as order value, purchase frequency, retention, and profit margin. Teams that increase their LTV typically increase their revenue.
Why lifetime value (LTV) is a critical metric
If product and marketing teams can improve LTV, they improve the overall profitability of the company. The LTV is calculated based on bottom line financial metrics and if LTV rises, it’s because one or all of these went up. There are several ways to measure LTV. Companies can measure the Gross LTV, which is the total revenue that customers bring in over their lifespan, or Net LTV, which is the profit from each customer over their time as a customer. The definition of LTV will vary slightly depending on each company’s vertical and business model. Generally, the higher the transaction rate and the larger the customer base, the more reliable and useful measuring LTV will be. For example, an e-commerce site with millions of customers might find LTV to be a useful metric. With so many data points, LTV would predict its customer value with reasonable accuracy. But for a B2B software company with little turnover and just a handful of clients, some worth millions and others mere thousands, LTV would be less helpful.
Four tactics for improving lifetime value
To increase lifetime value, companies must compel customers to spend more, purchase more often, and remain customers for longer. Product teams can do this by increasing:
Average order value (AOV)
Companies can increase LTV by increasing the average order size, either by raising rates or selling more products per transaction. Many retailers accomplish this by selling add-on items, which is why checkout counters in grocery stores are filled with gum, keyrings, and sweets. If add-ons are significantly less expensive than other products, buyers are more likely to buy them on impulse. This strategy works just as well online as offline. Travel brands can sell trip protection, e-commerce companies can recommend complimentary items, and financial apps can offer access to premium reports.
Though driving customers to make more purchases seems like a job for sales or marketing, product teams have the same if not more control over purchase frequency. When buyers find that shopping is simple, satisfying, or exciting, they’ll come back more often. When checkout processes are streamlined and purchases are easy to make, consumers buy more. Today, many of the greatest opportunities for increasing purchase frequency are on mobile. While half of consumers shop on their smartphones, only one in five make purchases there. Several of the top reasons consumer cite for abandoning shopping carts are:
- 37% – The site wanted me to create an account
- 28% – Complicated or long checkout process
- 20% – Website had errors or crashed
With analytics, product teams can diagnose their site and app usability issues to increase conversions.
While 97 percent of customers that churn do so silently, product analytics help product teams see why. Teams can analyze the behaviors that precede customer churn, so they can find and fix issues like broken links and confusing interfaces. Product teams can also track user sentiment. Intel Security, for example, uses Mixpanel to track Net Promoter Score, a standardized way to understand whether users appreciate features and products. Intel Security automatically emails users of its True Key product after they’ve completed several successful actions. The email asks users to grade the feature on a scale of 0-10. The product team uses this feedback to improve retention. “This experiment was a total victory for our team. Mixpanel made it easy for True Key to understand and directly engage in a conversation with our users,” said Marc-Antoine Ross, Intel Security Director of Data Engineering.
There are two ways for companies to increase their profit margin: raise rates or decrease expenses. Companies often find it much easier to do the former, as lowering expenses often requires more change throughout the business. Many marketing teams choose to promote add-on products which raise the overall profit margin. Product teams that want to justify their new, higher rates can do so by offering customers more value. This is often easier in digital products than physical products, where teams can roll out additional features through an update.