Improving Customer Lifetime Value

Video Transcription

Today we’re going to talk about improving customer lifetime value, and I’m going to demonstrate to you how relatively small tweaks In a medium-sized subscription business could give you £27,000,000 of additional value. So this is the £27,000,000 question.

How do I extract value from my subscription business?

So, let’s get underway, shall we? In a previous video, we talked about customer lifetime value. If you haven’t seen that, go and check it out first – we talked about the three key ingredients for customer lifetime value.

The Three Ingredients for Lifetime Value

We talked about the first ingredient being your customer acquisition cost, the second ingredient being our revenue and margin, and the third ingredient being our churn rate.

Customer Acquisition Cost

So we’re going to take an example of a business as is, and we’re going to assume that that business has a customer acquisition cost of £100.

Margin

For this example, we will have a very simple £100 margin delivered per year for the client you want to take on board.

Churn Rate

And we’re going to assume a churn rate of 20%.

So, when we put those numbers in the calculation, we get a customer lifetime value, or a CLV, here, of £400 for this particular customer. We’ve got a good customer lifetime value. but we want to improve it.

Most subscription businesses can significantly improve each metric that feeds into customer lifetime value.

Can we make a 20 per cent improvement in each metric?

So if we improve that by 20 per cent, our customer acquisition cost will come down to £80.

Perhaps we’ve improved the efficiency of our marketing, our sales close rate. We’ve understood our sales funnel. Maybe we’ve improved the efficiency of our sales model, our resourcing, that sort of thing.

We’re going to assume that we have been able to assess our pricing and assess our pricing plans and improve that revenue to £120 per customer. So again, a 20% improvement.

And we will assume that we can improve churn to 16% by bringing it down 20%.

So we’ve made a 20% improvement in these three metrics. What has a 20% improvement done to our Customer Lifetime Value (CLV)? Well, our customer lifetime value has gone up to £670 pounds now, so it’s increased by 270 pounds, or by 67% in this example.

Quite a significant change. I’m sure we’ll agree in Customer Lifetime Value from relatively modest changes in some of these metrics.

Example Impact on CLV

Now, for a medium-sized subscription business with 100,000 customers,

We’ve made an improvement of £270 in the value and we have completed the equation to get an additional £27 million worth of value out of our customers that we’ve got there.

So, as you can see, a huge improvement in the value of your business and you know £27 million, from a 20% improvement in three core metrics. A massive change. So well worth focusing on understanding how you can improve customer lifetime value.

That’s it for this session Look forward to seeing you next time.