Not all customers have the same impact in the world of subscription-based billing. Some may remain with your company for years, providing a reliable revenue stream, while others might cancel after just one billing cycle.
Evaluating the loyalty and profitability of your customer base can be complex, but calculating your customer lifetime value (CLV) offers crucial insights. By understanding CLV, you can refine your budgeting and planning strategies to better align with customer behaviors.
This article will delve into CLV, including its types, importance, how to calculate it, and actionable strategies to enhance it.
What is customer lifetime value?
Customer lifetime value is a metric businesses use to document the total revenue expected from customers throughout their entire relationship with the company. This value is helpful for several tasks related to revenue forecasting, budgeting, marketing, and profitability analysis.
Typically, CLV is calculated, tracked, and managed as an average of either the total customer base or particular market segments—such as by size, region, or consumer age.
Types of CLV models
There are essentially two strategies used when determining a CLV:
Historical
The historical approach relies on existing sales records and related data to identify value without considering whether the particular customer will remain active with the company.
Predictive
Conversely, the predictive model attempts to forecast what potential funds a customer can expect moving forward, often using recursive algorithms or machine learning to model future buying behavior.
Why CLV is important for subscription-based businesses
For any business, understanding your CLV provides you with increased visibility into consumer behavior as well as the overall health of your organization. In particular, you can more easily identify which specific customers or customer segments have the most positive impact on your cash flow. Armed with this insight, you can make more informed choices regarding how much to invest when marketing, acquiring, and retaining these customers.
Given that subscription-based businesses rely on recurring revenue from existing customers for the bulk of their income—rather than relentlessly pursuing new sales, for example—properly capitalizing on CLV is critical. As such, subscription-based businesses will typically place increased focus on retaining and supporting existing subscribers, encouraging higher-than-average CLVs compared to more “transaction-focused” organizations.
How to calculate customer lifetime value for subscription businesses
Depending on the business metrics that you have available, there are, in fact, multiple formulas that you can use to calculate your customer lifetime value. However, if you happen to be a subscription-based business, rather than using one of the more standard formulas, we recommend using either:
Customer Lifetime Value = Customer Value x Average Customer Lifespan
or
Customer Lifetime Value = Average Revenue Per User ÷ Churn Rate
To determine your average revenue per user (ARPU), you simply add all of the recurring earnings that your business would receive over a set period — typically identified as a monthly recurring revenue (MRR) or an annual recurring revenue (ARR) — and divide that total by the number of active subscribers.
Example calculation:
Consider this scenario: Dreamweaver Inc.’s aptly named DreamWeaver app guides users through guided meditation as they fall asleep to encourage lucid dreaming. The business offers its software under a subscription model, charging $50 per year for standard users and offering a premium plan of $110 per year, which delivers access to a broader pool of potential dreamscapes.
To determine its subscribers’ average CLV, Dreamweaver reviewed its July 2023 to 2024 sales figures. Over the course of the 12 months, the business had 3,000 subscribers at its standard tier and an additional 1,250 subscribers at its premium tier, meaning the business generated $287,500 in revenue. So, the company’s ARPU for the 12-month period was $67.65.
During the same period, the business received 213 cancellation notices among its total subscriber base of 4,250, netting a rather average churn rate of 5%. Based on these figures, the company calculated a CLV of $1,353.00 for its current customer pool.
Customer Lifetime Value = ARPU ÷ Churn Rate = $67.65 ÷ .05 = $1,353.00
How to improve customer lifetime value
Fortunately, there are numerous strategies to prevent customer cancellations and increase the revenue generated from each subscriber. The success of these measures will vary considerably depending on the nature of your subscription model, industry, and market. Here are some tips to improve your CLV:
Tip #1: Make it easy to cancel
Some subscription-based businesses make canceling their service difficult in an attempt to retain customers. While this might delay cancellations quickly, the negative impact on your brand can outweigh these gains. Customers who have had a positive experience are more likely to return, so making cancellation easy can preserve your reputation and encourage future business.
Tip #2: Introduce flexible subscription plans
Rather than pursuing a one-size-fits-all strategy, consider a tiered approach. By providing various, even customizable plans to subscribers, you can attract a broader customer base. Buyers can choose a model that fits their unique needs and budget, increasing the likelihood of long-term retention.
At the same time, a tiered approach offers the opportunity to up-sell to existing subscribers, making it possible to boost the CLV for the individual customer if they choose higher-value plans.
Tip #3: Simplify your payment processes
Building on this theme of convenience, you should make it as straightforward as possible for subscribers to pay you. According to a 2022 study published by Balance Payments, Inc., 83% of surveyed employees responsible for business purchases have identified a “smooth” checkout experience as their top priority when choosing online suppliers. Similarly, 90% stated that complicated payment processes would impact their loyalty to a given brand.
If you’re hoping to enhance convenience to encourage long-term subscribers, consider implementing subscription billing software—particularly one with a user-friendly payment portal that delivers convenient autopay capabilities. At the same time, you should expand the types of payment options you support.
Tip #4: Promote annual billing
Frequent billing cycles can prompt subscribers to reconsider their commitment. By offering annual or multi-year subscription options, you reduce the frequency of these evaluations and can secure a higher average CLV. Less frequent billing also minimizes the chance of cancellations due to budgetary concerns.
Tip #5: Tailor your marketing
As previously stated, you can calculate a CLV for your general customer pool and individual segments. By determining the values for various market segments, you can more easily isolate which demographics will likely stick with your business for the long term.
With this insight, you can adjust your marketing campaigns to attract more subscribers from these particular groups. Since you are targeting these efforts along specific buyer demographics, you can more easily personalize and align these offers with the unique needs of these high-value customers.
Tip #6: Enhance customer communication
Businesses that provide high-quality customer service often enjoy greater loyalty. Communicate early and frequently with your subscribers about their service, including recommendations on how to get the most value out of their subscription.
At the same time, satisfaction surveys should be regularly conducted, and customers will have ample opportunity to proactively raise any questions or concerns. If an issue arises, the more quickly you address and resolve it, the less likely it will fester into a cancellation.
Tip #7: Address passive churn proactively
For subscription-based businesses, customer churn tends to manifest in one of two ways: active churn, where the subscriber intentionally ends their plan, and passive churn, where the service is unintentionally canceled, often due to a payment failure or other technical issue. Obviously, any increase in churn will have a negative impact on CLV, so you should take measures to limit the potential for passive churn.
Before a subscription expires, communicate with the customer, encouraging them to renew and confirm their payment information. As previously suggested, a payment portal can prove invaluable in empowering subscribers to manage their payment details and avoid unnecessary errors or disruptions. If a failure does occur, proactively follow up with the subscriber to see if the issue can be resolved.
Tip #8: Leverage your data
Successful subscription services continually enhance their offerings based on data. Assuming that you are actively tracking the CLV of your subscribers, you are likely also monitoring and reporting on other sales performance and subscription metrics. Investing in analytics tools or subscription billing software with comprehensive reporting features such as Invoiced will help you more readily detect patterns in this data, allowing you to spot subscriber trends and identify potential areas for service improvement or opportunities to create new offerings.
Implementing these strategies can improve CLV and foster long-term subscriber relationships.
Subscription billing is made easy with Invoiced’s A/R software
Invoiced’s Accounts Receivable Automation software is designed to deliver exceptional ease and support for your billing processes with our subscription billing feature.
Our platform features a comprehensive self-service payment portal and seamless autopay options, allowing you to automate invoicing with no transaction fees. This ensures a consistent, predictable billing experience for your customers while providing you with the key metrics to optimize performance across all subscription tiers.
Discover how Invoiced can enhance your billing processes by scheduling a demo today.
