Customer Lifetime Value: Handling Changing LTVs
As with life, change is a constant with your customers. Especially when your business is growing, everything about your customers will change, including the revenue they generate, how long they stick with you and what they need from your business.
For all of these reasons, your customer Lifetime Value (LTV) will change over time as well. Sometimes it changes every year, but often it changes more frequently and when you least expect it. A sudden drop in LTV can be a big hit to your business if your customer acquisition costs are not adjusted quickly! You can go from paying $100 to acquire customers worth $200 to paying the same amount to acquire customers worth $50 overnight.
So, how do you handle constantly changing LTV and stay on top of any sudden changes? Here are some techniques:
- Cohorting. Instead of tracking one LTV for all of your customers, track the LTV of customers by the month they first became a customer. This allows you to tell if customers from February are worth the same amount as customers from January. You can use daily, weekly or monthly cohorts depending on your type of business.
- Make auditing a habit. Never assume your LTV calculation is correct just because it was last month. Just like all of your important metrics, you should revisit it on a frequent basis to make sure it is both correct and representative of your business.
- Watch for early indicators. There are many indicators that your LTV is changing quickly, including price drops, jumps in customer churn or even shifts in customer engagement. If you identify a few early indicators then you’ll know when it’s worth revisiting your LTV assumptions.
It may not be possible to catch a change in LTV immediately, as it may take weeks or months to understand fundamental changes in customer engagement. Staying vigilant is your best defense, so watch out!
Also, always wear your seat belt. That’s generally good advice.
Quote of the Day: “The only constant in life is change” – Origin Unknown