Once you have established a churn rate for your customers, you can then estimate life expectancy according to the following formula: Life Expectancy = 1 / Churn Rate For example, a customer whose renewal period is annual with an estimated annual churn rate of 32 percent will have a life expectancy of 1 / 0.32 or approximately 3.1 years. As you estimate life expectancy, you will want to express your life expectancy using a consistent time period that corresponds to your subscription renewal cycles. For example, if your business has contracts that renew annually, then your LTV calculation will estimate how many years you expect to keep each customer. 2. Revenue Expectancy It goes without saying that how much value you think you will earn from your customer in future periods is largely dependent on the revenue you expect from your customers. To estimate this, you not only need to look at current bookings (or revenue under contract), but you also need to estimate how the revenue you get from your customers is expected to change over time. Do you expect your customer to buy an upsell, continue to pay the same amount, or downsell? A good way to estimate future changes in current subscription revenue is to use your Net MRR Retention rate. Net MRR Retention is defined as the dollar amount of your renewals divided by the dollar amount up for renewal. It gives you an
aggregate measure of upsells relative to downsells and churns across your entire customer base. In an attempt to find better alternatives to using Net MRR Retention in the revenue expectancy element of LTV, Zuora is currently experimenting with a few new methods aimed at improving the state-of-the-art, by attempting to estimate revenue expectancy individually, by customer. These methods attempt to go beyond using just standard Net MRR Retention to a more personalized estimation. The idea holds promise. For example, Apple Music offers three plans (see image below) Inherent in this packaging structure are two predictable upgrade paths (Student to Individual, and Individual to Family). Modeling those upgrade paths into individualized estimates of upgrade or downgrade likelihood could prove quite effective at improving LTV accuracy beyond a wholesale average net retention factor. 3. Cost Expectancy The third element of lifetime value is estimating how much it costs you to deliver your product or service. Each of your subscription products has a particular contribution margin associated with it that needs to be estimated. Contribution margin represents the variable costs that go into providing your product and is a measure of the profitability of your subscription products. Some businesses leave out cost expectancy from LTV, but doing so leaves out an important element if you plan to make spending decisions based on LTV.