While subscription models change and evolve over time, one thing that never goes out of style is customer lifetime value (LTV). This is a key metric that subscription companies use to benchmark their success. We’re going to explore what LTV is, how to measure it and share some tips on how to optimize it to get the most LTV from your subscribers.

What is LTV?

Put simply, LTV is the total profit a subscription company makes between a subscriber’s first and last purchase, explains Alycia Simpson, VP Global Demand Gen & Operations, for Recurly, a subscription management and billing platform. Customer lifetime value is an estimate of the average total value of a customer over their lifetime from sign-up to churn. Simpson says subscription businesses tend to have higher LTVs than non-subscription businesses because subscription companies have ongoing customer relationships and LTVs that grow the longer subscribers stay with the company.

“The more money you make from someone for a longer amount of time, the more money you’re delivering to your business. For many subscription businesses, this is the value driver. It’s the value driver for a lot of different businesses,” Simpson says. “But this is the metric when I think of subscriptions. And this delivers a customer-centric guide that’s critical to effective marketing and sales strategies for acquisition, retention, upsells, cross-sells, the whole gamut.”

For example, Marcus Robinson subscribed to Netflix in March 2020, paying an average monthly membership fee of $17.99. Multiply that by 26 months, and Marcus’s LTV is $467.74, less any customer acquisition costs. The longer Netflix retains Marcus, the higher his LTV will be. Netflix can calculate the average LTV of their 232.5 million global streaming paid members at any point in time and use that as a benchmark upon which to can measure future success.

Let’s say the average LTV of a Netflix member is $300 as of March 31, 2023. Netflix can look at the average overall LTV monthly to see if their LTV is increasing, decreasing or staying steady. They can use this critical metric to make important business decisions. Does the LTV fluctuate when prices increase, when new content slates are announced, or when a competitor raises their prices?

The CAC to LTV ratio

Successful companies track their customer acquisition cost (CAC) to LTV ratio to identify the return on their investment. Let’s start with a definition of CAC – it is an estimate of the average cost to acquire a customer.

Regardless of what a company’s LTV is, if it costs the company more to acquire subscribers than it gets from those subscribers, they aren’t making money or a return on their investment (ROI). Simpson advises subscription companies to track and constantly iterate across the subscriber journey to optimize for CAC to LTV.

“It’s a great indicator of profitability. So a benchmark for successful subscription businesses is somewhere around triple. A ratio of 3:1 is the benchmark you should shoot for, so you get $3 back for every $1 you spend,” Simpson explains.

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How to calculate LTV

A simple way to calculate customer lifetime value is to take the average monthly amount expected from each customer and divide it by churn rate, which is the rate at which a subscription company loses customers each month.

How to calculate CAC

Customer acquisition costs can be calculated by dividing the sum of sales and marketing expenses by the number of new customers added.

Using a cohort analysis to identify your ideal subscriber

Simpson recommends completing a cohort analysis to get a deeper understanding of a company’s subscriber base. By conducting such an analysis, companies can identify trends and gaps for high-performing channels, the most uses areas of a company’s product, etc. Perhaps more importantly, a cohort analysis can help companies identify their ideal subscriber to help them get more focused to drive revenue growth and LTV.

“You can actually get a sense of lifetime value before you’d actually be able to see lifetime value, which can help you make better decisions for marketing, customer acquisition tactics, etc. I’m really talking about forecasting LTV here,” Simpson says. “You can create these types of reports for any area of your business. Trial performance, plan performance, payments, subscriber growth, churn, and other things.”

Companies can increase ROI of their efforts by creating an analysis by:

• Trial length, offering or promotion (coupon, discount, etc.)
• Track performance and conversions and cancellations
• Identify how many customers didn’t convert and why
• Optimize efforts for highest-converting, highest purchase value, etc.

For additional information on how to create reports and analyze cohorts, watch Simpson’s webinar or download the slides at the end of this article.

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Segmentation

Segmentation is an important piece of the puzzle to ensure companies are valuing their products adequately and creating higher value subscriptions, not just adding subscribers.

“Segmenting your audience is the best way to achieve long-term growth, optimize user experience, and understand where your customers fit in your customer ecosystem. So then you can figure out how to promote or cross-sell, etc.,” says Simpson.

Simpson also says that companies can use segmentation to create dynamic programs like paywalls, packaging, promotions, and content for the purposes of acquisition and retention. She shares the following examples of segmenting to get the highest LTV:

• Revenue/purchase value
• Plan, usage, upgrade
• Acquisition channel
• Funnel stage/place in buying process
• Geographic, demographic, vertical
• Interest-based behavior
• Most likely to churn and when

Simpson shares the example of how PupBox tailors their onboarding communications based on segmentation.

Ideal customer profile

Once companies have identified their ideal customer, companies can use the following tactics and techniques to maximize customer lifetime value:

• Build customer personas based on key buyers (who they are, what they care about, sites they engage with)
• Define messaging and value propositions
• Prepping content, create offers and products
• Advertise where readers are
• Tailor offers, promotions and communications
• Create a reporting framework

Channels

Another way to optimize LTV is to look at which channels are producing customers with the highest LTV.

“When it comes to channels, I’m always looking to what channels produce customers with the highest LTV? So if you’re now segmenting your data by acquisition channel, you should know which channels are most effective and return the highest ROI and conversions, etc.,” Simpson explains. “Then you know where to focus efforts, where to put more budget, and what to optimize first.”

“For example, if you’re using paid ads for advertising, I would create a testing framework and optimize those channels first to expand them. And then include additional ads targeted to your highest converting audiences before then expanding into a net-new channel, so you nail that first channel first, and then expand into a new area to test. You have an ‘always running’ engine that gives you a baseline,” says Simpson.

“Drive revenue by pivoting and expanding your offers and revenue streams, so find new ways to engage your existing customer base, and then to find net-new customers. Now that you’ve identified patterns of different customer segments, you can leverage that data to infer patterns of other buyers and what their interests might be,” Simpson adds.

Programs

For programs, Simpson recommends putting resources where they yield the best results, doubling down on what works and refining the offering from there.

“Because it’s not a one-size-fits-all for programs. If you have different buyers, they come to you from different places, they like different things, and they have different habits. It’s really finding the programs that are going to speak to people in how they want to be spoken to. And that’s why segmentation is such a big point,” says Simpson.

Upsell and cross-selling tactics

Here are some tactics subscription companies can use to upsell and cross-sell their subscription products and services:

• Tag content, items, areas of the product by persona interest, value, topic, etc.
• Use dynamic content to recommend content, cross-promote products, and samples in boxes.
• Create personalized experiences with content hubs, bespoke products that feature suggested items.
• Find new avenues to promote complementary products based on insights.

Key takeaways

Simpson shares key takeaways for recurring billing merchants:

• Use cohorts for a deeper understanding of your customer base.
• Segmentation is the most impactful way to deliver consistent value.
• Focus efforts on the ideal customer profile to deliver the highest LTV and ROI.
• Optimize for CAC:LTV with acquisition efforts.
• Optimize for LTV includes reducing failed transactions.