Lifetime Value (LTV) refers to how much revenue a customer is estimated to deliver, across their entire time buying from the business.
Lifetime Value (LTV) is an essential metric for certain companies, especially those with service or subscription models — like SaaS businesses. A clear read on how much the average customer should bring in across their lifetime will empower more informed marketing and sales strategy decisions, helping to increase profit and lead generation.
LTV should inform almost every decision a business makes. So, in this sense, having the right metrics in place to calculate Lifetime Value is crucial for every organization.
However, as mentioned, Lifetime Value is particularly important for businesses with long-term or subscribing customers.
Unlike companies that rely on individual purchases from multiple customers, those with subscription business models have a much higher LTV — and each new customer adds a lot to the bottom line.
Naturally, the precise method of calculated LTV will differ from company to company, depending on the business model.
That said, in the case of subscription companies — who rely on Monthly Recurring Revenue (MRR) — there is a quick calculation that can be used. Simply take the average MRR of your customers, then divide it by the percentage of customers you lose per month (also called your churn rate). This will give you a good estimate of your Lifetime Value (LTV).