How to Determine Customer Lifetime Value | Ep. #382

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In Episode #382, Eric and Neil discuss how to determine customer lifetime value. Tune in to learn the simplest formula you can use to calculate your customer lifetime value. Eric and Neil also drop several online tools that simplify the process and will do the math for you.

Time Stamped Show Notes:

  • 00:27 – Today’s topic: How to Determine Customer Lifetime Value
  • 00:38 – There are multiple ways to determine customer lifetime value
  • 00:52 – Eric shares an example of a SaaS company’s customer lifetime value
    • 00:55 – Neil’s Crazy Egg has a churn of 10%, which is the number of customers who stopped using the product
    • 01:08 – Average price per user ID is $30, so you divide $30 by the churn to get the lifetime value
    • 01:40 – Technically you take the average pay per month
  • 02:00 – Mixpanel can calculate your customer lifetime value
  • 02:10 – RJMetrics can do it for you, too
  • 02:21 – There’s a formula on Kissmetrics that you can copy to calculate the customer lifetime value
  • 02:31 – Eric has tried different formulas and the one on Shopify’s blog is one worth checking out
  • 02:50 – You can do the formula yourself, but there will always be flaws
  • 03:00 – Marketing School is giving away a free 1 year subscription of Crazy Egg which is a visual analytics tool
  • 03:59 – That’s it for today’s episode!

3 Key Points:

  1. There are several ways to calculate customer lifetime value, just find the one that suits you and your needs best.
  2. Consider using a tool for a more accurate calculation of lifetime value.
  3. You can create and execute the formula yourself, but don’t expect it to be error-free.

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Full Transcript of The Episode

speaker one: Get ready for your daily dose of marketing strategy and tactics from entrepreneurs with the guile and experience to help you find success in any marketing capacity. You are listening to marketing school with your instructors Neil Patel and Eric Siu.

Eric Siu: Welcome to another episode of marketing school, I am Eric Sui.

Neil Patel: I'm Neil Patel.

Eric Siu: And, toady we are going to talk about how to actually determine customer lifetime value. So, there's a lot of ways to do this, and I am going to give you the simple way of doing it through software as a service at least, but bear in mind.
This is not the end-all-be-all, wait there's actually multiple ways of doing it and this way can be, when you look at multiple ways, there can be flaws some times, so I'm not saying that this is perfect, but let's look at it this way right, let's look at Neil's tool crazy egg.
Let's say crazy eggs turn monthly turn, so this is the number of users that he's losing. A month is 10%, which is actually really bad, so if your turn is 10%, and the average user is paying $30 or something like that, basically what you do is, you divide the $30 divided by the churn and then you get your lifetime value that way. So what does that come out to 300 bucks or something.

Neil Patel: Not really because, assuming it is a 10% churn, its 10% month-over-month, so technically you are losing less and less.

Eric Siu: Yep, so, you can see how that calculation ... this is the calculation that I learned, but basically you take the average revenue per sale or ARPU, average per user ... our projection not the right number, but anyway what you are charging per month 30 bucks divided by 10% and then you get 300 and that's how ... There're some SAS people that do that, but you can see there's flaws what did and I not Neal kind of poke holes in that logic.

Neil Patel: Yah there's a free tool, not a free tool, I think it's free for startups but you can check out Mixpanel.com it'll calculate your lifetime value of your customers for you. That's a simple way and it's probably the easiest way to get your LTV. There's a lot of BI tools like RJ metrics. I do;t know if they calculate LTV but I'm pretty sure they do so, you can check them out as well. It's a really complicated formula, instead of trying to do it yourself, you can either copy a formula, there's an infographic on the KISSmetrics site on lifetime value, so you can copy that or you can sign up for a service like Mixpanel, which calculates LTV for you.

Eric Siu: Yah, I've tried I mean, a couple of years ago, I've tried looking at all the different calculations. There's this insane one on Shope the Shopify blog, and it's just this insane formula where you, it's almost as if you're back in calculus again. So, use this tool, I mean, there're so many LTV calculators out there but if you want to do it by hand like if you want to do it offhand, you can just use the formula that I use but just bare in mind there could be flows with it. The other thing is, before we go, I wanted to tell you about crazy egg, so crazy egg, we are giving away a one-year annual subscription to it and I'll let Neil explain what it is before we hop off.

Neil Patel: Sure, so, crazy egg is a visual analytics tool. If you want to know where people are clicking and engaging on your side, which pages they're not, if they're even reading your content, you should check it out. The cool part about it is it'll show you mouse recording that'll I show you how far people are scrolling down, like if your-call-to-actions are in the right places or if you have too many forme fields and, which field is causing all the drop offs. You can also use it for A/B testing, you can use the WYSIWYG in there, so you can make marking changes on the fly without needing a designer or a developer. Yah, it's an amazing tool, you guys can check it out and we're giving away one week.

Eric Siu: Yep, and if you want to get access to this, we are giving away multiple entries every single week, so you can learn more about how you can actually do that just go to singlegrain.com/giveaway, again singlegrain.com/giveaway and we will see tomorrow.

speaker one: This session of Marketing School has come to a close. Be sure to subscribe for more daily marketing strategies and tactics to help you find a success you've always dreamed of. And, don't forget to rate and review so we can continue to bring you the best daily content possible. We'll see you in class tomorrow right here on Marketing school.

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