First of all let’s remember that LTV is a metric that shows the total revenue, which our customers leave us, during their entire life cycle.
LTV is a good metric to evaluate the financial health of a SaaS.
If the LifeTime Value is high, it means that customers are generating significant revenue for the company throughout their relationship with the company, indicating a solid customer base with good retention.
Conversely, a low LTV may indicate that the expectations that customers are buying from us are not being met, as these customers are not renewing their plans and may need to adjust their business model or improve the customer experience to retain existing customers and attract new ones.
It is important to keep in mind that LTV is not a static metric and can change over time. Companies can work to improve their LTV through strategies such as customer retention, improving user experience and personalizing product offerings. Another important related metric we already looked at in this pots on LTV calculation and related metrics.
There are four types of LTV behavior that any cohort can show:
The cohort doesn’t generate more incremental revenue. This means that, on average, the company’s customers spend a similar amount of money with the company throughout their relationship, rather than spending more as time goes on.
This is not necessarily a bad thing if the flat LTV is at a high enough value to be profitable. However, if the company wants to grow and improve its long-term profitability, it is important to work to increase the lifetime value of customers and overcome a flat LTV.
The cohort continues to spend as time passes although spending decreases over time. These cohorts approach flat LTV after some time. Most companies fall into this category. Customers spend initially and then spend less and less as time passes.
To address a sublinear LTV, companies can focus on improving customer satisfaction, offering new products and services that appeal to existing customers, and improving their customer retention strategy. They can also explore opportunities to reduce costs and increase efficiencies in their business model to improve overall profitability.
The cohort consistently spends the same amount per user on the cohort. This model could be that of companies like Spotify.
There is likely to be some drop-off in the first month, but after that your cohorts are likely to evolve linearly or to little less than sublinear, assuming the primary Spotify user has no intention of ever canceling their subscription.
Super linear LTV
Customers spend more as they get older. For example, this is almost certainly the case with Amazon Web Service. In your first month on Amazon you spend some money and in the following months this spending increases.
That’s why they don’t care if they give you 100K in perks, then it will be “almost impossible to migrate”. Another example is Slack. Each Slack paying customer is a startup that pays per number of employees. As the team grows, it buys more accounts.
LTV Calculation and Dashboards for LTV Cohort Analysis
Why are some cells in the cohort analysis of this Saas blank? Because these cells refer to a point in the future.
This type of chart is extremely useful for quickly identifying problem months, with respect to churn or retention.
The colored shading makes the problem areas immediately visible.
Other ways to visualize Saas cohort analysis
It is also possible to view a cohort analysis as a stacked line graph:
And finally, a line chart. This type of graph does a great job of demonstrating the non-linear characteristics of churn:
In summary, LTV is one of the most important metrics for SaaS companies, as it represents the amount of money a customer is expected to spend over their entire lifecycle. It is essential to understand how LTV can evolve and how cohorts can be represented to optimize this metric and improve long-term profitability.
To maintain a healthy LTV, it is important to focus on customer satisfaction, retention and customer growth. Companies must work on their marketing strategy to attract and retain high-quality customers, and then implement upsell and cross-sell techniques to increase customer spend over time.
That’s why it’s vital to measure the entire user customer journey, from acquisition metrics, to retention…. And you know that you can use the Next Scenario tool for this purpose.