Forrest highlighted an interesting finding today, which found that when we layered in complexity, our customer lifetime value increased 40% over the last year. It's a great example of how simple isn't necessarily what users are looking for in an application. In Notable, we layer in the functionality based on the complexity of the problem customers are solving. 40% is a fairly large jump, but for some of you, the question might be, "what is lifetime value (LTV) anyway?
Lifetime value is the net present value of the cash flows attributed to the relationship with a customer. That's a lot of important sounding words. What are we really talking about? In a SaSS (software as service) business model, like Notable, we're making money by providing a service each month. Customers pay a fixed amount each month to use the service.
Over time it isn't reasonable to think you can keep a customer paying for your service indefinitely. People will drop off from your service, which we calculate as a churn rate. The churn rate helps us determine our retention rate, the key component of calculating the lifetime value of a customer. I'm not really an analyst, so I was originally very confused by the concept. A few years ago, I came across Andrew Chen's post on the subject and he did an amazing job of outlining how to calculate the LTV. We use his formula, and it looks something like this:
LTV of an account = (1/(1-rentetion) * revenue)/ accounts
To be honest, I had to view an excel document with the value of all our customers eventually heading to 0 to fully grasp the concept. But I'm glad we adopted this metric as it helps us understand what our investment can reasonably be to earn a new customer.
So from a business and marketing perspective, it's important to have a number to help you forecast your spending to earn new customers. By increasing our LTV by 40%, it gives our business the flexibility to be more aggressive with our marketing efforts. Circling back to the original article, simple doesn't always translate to a better business.
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