Instead of focusing on short-term wins, businesses that rely on subscriptions should consider how much money a customer brings in over the entire time they subscribe. This is called customer lifetime value (LTV).
For example, a newspaper might track how much money each subscriber pays over the years, rather than just how many new subscribers they get each month.
This helps businesses understand which customers are more valuable and how loyal they are likely to be. A high-value subscriber who renews their subscription for years might be worth more than several low-paying subscribers who cancel quickly.
There are two main parts to LTV: what a customer has already paid and what they are predicted to pay in the future.
- Past payments: This is simply how much money a customer has spent since they started subscribing.
- Predicted future payments: This is an estimate of how much more money a customer will spend before they cancel.
A special computer program is used to predict how much money a customer will spend in the future. This program considers two things:
- How much the customer likes the subscription: This is based on how often they use it.
- How much money the customer has: This is estimated based on their job, where they live, and how they pay for things.
The program gives scores to these factors based on how important they are for predicting whether someone will renew their subscription.
- For individual subscribers, how often they use the subscription is the most important factor. Discounts don’t have a big impact.
- For businesses, how often their employees use the subscription is also important, but it’s a bit trickier to predict because the price can change depending on how many people use it.
By understanding customer lifetime value, businesses can make better decisions about how to attract and keep valuable customers.
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