How 1% Reduction in Churn Equals 5% Increase in Lifetime Value

The one metric that really matters, when push comes to shove, is the lifetime value (LTV) of a customer. This is particularly the case for businesses such as content providers and telcos, which rely heavily on subscriptions and contracts for revenue. In fact, to have any hope of a viable business, LTV has to be significantly greater than customer acquisition cost (CAC). And therein lies the challenge.

Many companies spend relentlessly on user acquisition in the hope that if they throw enough mud, some of it will stick. But the times are a-changing, and in today’s marketing landscape, you can’t just buy your way to loyal, longterm, paying customers.

Here’s the good news: there’s a better way. By focusing on reducing churn from your service, through personally relevant communications, you will significantly increase LTV. We know this sounds obvious, but you’d be surprised at how often we see user retention and engagement overlooked by brands.

Let’s do some basic maths. LTV is calculated as the average revenue per paying user (ARPPU) minus the marginal cost, divided by churn percentage. Or essentially it’s annual gross margin divided by churn percentage. Either way, it’s not rocket surgery.

LTV = (ARPPU -  marginal cost)/churn%

Here’s an example. Take a plan that costs customers $10 per month. The mathematically sharp readers will have calculated that this adds up to $120 per customer annually. At 70% gross margin this leaves us with $84 annual gross margin. Let’s say that churn is 25%. The LTV of that customer, if we go by the formula, is $336.  

Now, here’s where the magic happens. If churn drops 1 point to 24%, when we divide that into annual gross margin, LTV jumps 4.2% to $350. The gains move around but typically coalesce around 5%, and that's why focusing on churn is so valuable. It is guaranteed growth!

We’ve written extensively about how you can reduce churn through personally relevant customer communications, so why don’t you check out one of our blogs, blueprints, whitepapers or videos and start increasing your customer lifetime value now. Better yet, contact us to speak to one of our experts.