Lifetime Value How to figure it out Lifetime Value is talked about in two ways; member tenure and member yield or ARPU (Average Revenue Per User) and comes down to how many months, on average, one customer stays and how much they spend during that time. The average tenure of members can be skewed by sleeper members. Check for any sleepers when doing your calculations and remove them from your dataset to ensure you’re working from accurate figures. Next is the average revenue per member, which you multiply by the tenure to get an average Lifetime Value. You need to calculate Lifetime Value by looking at what members are actually paying per month – not your advertised rate. Any membership discount you give is actually an acquisition cost and must be added to your cost of acquisition. The longer a member stays, the more they get into the habit of buying a coffee or grabbing a snack and seeing these costs as part of their visit experience. It’s difficult to calculate this revenue, so exclude it for now, but bear in mind the impact retention can have on your members’ lifetime value across all areas where they spend with you. This is also true of membership referrals.
Payback period How to figure it out Once you know your customer acquisition costs and average revenue per month you can work out how many months, on average, it takes for the member to be a customer in order to create a profit. A return on your investment enables you to reinvest money into winning another customer, and this payback period is what indicates how fast you can be spending money. In simple terms, if it costs £50 to acquire a member and they pay £50 a month membership, your payback period is one month, which means you can spend £50 again next month to win another customer; although note that you are getting no margin. 52
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However, if your acquisition cost is £100 and the average membership is £25 per month, your payback period is four months. This means you need to either wait four months before reinvesting, raise investment or take on debt so you can accelerate growth by winning customers faster than it pays back. The alternative is to reduce your customer acquisition costs and/or increase your membership prices, so payback is quicker.
Markers of success In pretty much any sector, a Customer Acquisition Cost to Lifetime Value (CAC:LTV) ratio of 1:3 indicates your business is growing effectively. This means if you’re spending £30 acquiring a new customer and they generate £90 of lifetime value you’re spending about the right amount. If you’re closer to a 1:1 ratio (ie, you’re spending £30 to get a customer who generates £30) you’re spending too