# Lifetime Value

Customer Lifetime Value (LTV) is the total revenue a customer generates over their entire relationship with your business. Increasing LTV is the highest-leverage activity in marketing because it costs nothing in acquisition — these people are already your customers. The most profitable businesses are not the ones that acquire the most customers; they are the ones that extract the most value from each customer relationship.

## LTV Formulas and Calculation

Understanding LTV starts with knowing how to calculate it. There are several formulas depending on your business model.

### Simple LTV Formula

**LTV = Average Purchase Value x Average Purchase Frequency x Average Customer Lifespan**

Example: A customer spends an average of $100 per purchase, buys 4 times per year, and stays for 3 years.
LTV = $100 x 4 x 3 = $1,200

### Subscription LTV Formula

**LTV = Average Monthly Revenue per Customer / Monthly Churn Rate**

Example: Average monthly revenue is $50 and monthly churn rate is 5%.
LTV = $50 / 0.05 = $1,000

### LTV with Gross Margin

**Gross Margin LTV = LTV x Gross Margin %**

This gives you the actual profit per customer, not just revenue. If your LTV is $1,200 and your gross margin is 60%, your Gross Margin LTV is $720. This is the real number that should be compared against CAC.

### LTV Calculation Worksheet

| Metric | Your Number | Notes |
|--------|-------------|-------|
| Average purchase value | $ | Total revenue / number of purchases in a period |
| Average purchase frequency (per year) | | Number of purchases / number of unique customers |
| Average customer lifespan (years) | | 1 / annual churn rate, or track directly |
| **Simple LTV** | $ | Value x frequency x lifespan |
| Gross margin % | | (Revenue - COGS) / Revenue |
| **Gross margin LTV** | $ | Simple LTV x gross margin % |
| Customer acquisition cost (CAC) | $ | Total acquisition spend / new customers |
| **LTV:CAC ratio** | :1 | Gross margin LTV / CAC |

### LTV by Segment

A single average LTV obscures important differences. Calculate LTV by:

| Segment Type | Why It Matters | Example |
|-------------|---------------|---------|
| Acquisition channel | Know which channels bring the most valuable customers | Google Ads customers: $1,800 LTV vs. Facebook: $900 LTV |
| Product/Tier | Understand which products drive long-term value | Pro plan customers: $3,000 LTV vs. Basic: $600 LTV |
| Cohort (sign-up date) | Track whether LTV is improving or declining over time | Q1 2024 cohort: $1,500 LTV vs. Q1 2023: $1,200 LTV |
| Customer persona | Different personas may have very different value | Enterprise segment: $15,000 LTV vs. SMB: $2,000 LTV |
| Geography | Regional differences in value and retention | North America: $2,400 LTV vs. Europe: $1,800 LTV |

## Ascension Model Design

The ascension model is a product ladder that guides customers from an entry-level purchase to progressively higher-value offerings. It is the engine of LTV growth.

### The Four-Tier Ascension Model

| Tier | Price Point | Purpose | Margin | Example (SaaS) | Example (Service) | Example (E-commerce) |
|------|-------------|---------|--------|----------------|-------------------|---------------------|
| Entry | Low / Free | Acquire and prove value | Low or negative | Free trial or Starter at $29/mo | Free consultation or audit | Lead product at cost or small margin |
| Core | Mid | Deliver primary value and generate profit | Medium | Pro at $99/mo | Retainer at $3K/mo | Core product line at full margin |
| Premium | High | Deliver enhanced value for best customers | High | Business at $299/mo | Strategic engagement at $10K/mo | Premium/luxury product line |
| Ultra-Premium | Very High | Exclusive, high-touch, transformational | Very High | Enterprise custom pricing | Advisory board seat, equity deal | Bespoke/custom, concierge service |

### Designing Your Ascension Model

For each tier, answer these questions:

| Question | Entry Tier | Core Tier | Premium Tier | Ultra-Premium Tier |
|----------|-----------|-----------|-------------|-------------------|
| What does the customer get? | | | | |
| What problem does it solve? | | | | |
| What is the price? | | | | |
| What triggers the move to the next tier? | | | | |
| What percentage of customers should be at this tier? | 60-80% | 15-25% | 5-10% | 1-3% |

### Ascension Triggers

The key to the ascension model is knowing when and how to move customers up. These are the common triggers:

| Trigger | How to Detect | Response |
|---------|--------------|----------|
| Usage limit reached | Analytics: customer hitting plan limits | "You have used 90% of your [feature]. Upgrade to [tier] for unlimited access." |
| Success milestone | Customer achieves a measurable result | "Congrats on [result]! Customers at this stage typically benefit from [premium feature]." |
| Time-based | Customer has been at current tier for X months | "You have been with us for 6 months. Here is what [next tier] customers are achieving." |
| Request-based | Customer asks about a premium feature | "Great question! That feature is available on our [tier] plan. Here is what it includes." |
| Business growth | Customer's business metrics indicate they have outgrown current tier | "It looks like your team has grown to [X]. Our [tier] plan is designed for teams your size." |

## Upsell and Cross-Sell Strategies

### Upsell vs. Cross-Sell

| Strategy | Definition | Example |
|----------|-----------|---------|
| Upsell | Selling a higher-tier version of what they already have | Starter to Pro plan; basic service to premium service |
| Cross-sell | Selling a complementary product or service | CRM customer also buys email marketing tool; tax client also gets bookkeeping |

### When to Upsell and Cross-Sell

The most effective timing is at the "point of maximum satisfaction" — right after the customer has experienced a win or positive outcome.

| Timing | Why It Works | Example |
|--------|-------------|---------|
| After first success | They have proof your product works | "You just closed your first deal using our CRM. Want to see how automation can 3x your pipeline?" |
| At renewal | They are already evaluating the relationship | "As you renew, here is what upgrading to Pro would add to your workflow" |
| After positive support interaction | Goodwill is high | "Glad we could help! By the way, customers with [feature] typically see 2x faster results" |
| After a referral | They just vouched for you | "Thanks for the referral! As a thank you, here is early access to our [premium feature]" |
| During a QBR/check-in | Structured time to discuss value and growth | "Based on your results this quarter, I think [additional service] could accelerate your growth" |

### Upsell Communication Templates

**Upgrade prompt (in-app):**
"You have used [feature] [X] times this month. Upgrade to [tier] to unlock [specific benefit] and [specific benefit]. See plans."

**Upgrade email:**
"Hi [Name], I noticed your team is getting great results with [feature]. Customers like you who upgrade to [tier] typically see [specific improvement]. Here is what you would get: [3 bullet benefits]. Upgrade now and we will waive the setup fee."

**Cross-sell email:**
"Hi [Name], since you are using [product A] to [achieve result], I wanted to let you know about [product B]. It works together with [product A] to [combined benefit]. [X%] of customers who use both see [specific result]."

## Raising Prices

Raising prices is the simplest and fastest way to increase LTV. It requires no new customers, no new products, and no additional marketing spend.

### When to Raise Prices

| Signal | What It Means | How Much to Raise |
|--------|--------------|-------------------|
| Close rate above 80% | You are too cheap | 15-25% |
| No price pushback from customers | You are undervalued | 10-20% |
| You are busier than you can handle | Demand exceeds supply | 20-30% |
| Competitors are more expensive | You are leaving money on the table | Match or exceed competitor pricing |
| Your costs have increased | Margins are shrinking | At minimum cover cost increases; ideally improve margins |
| You have added significant value since last pricing | Customers are getting more than they pay for | 10-20% to reflect added value |

### How to Raise Prices

| Approach | When to Use | Implementation |
|----------|-------------|---------------|
| Grandfather existing, raise for new | When loyalty is critical | Existing customers keep current price; new customers pay more |
| Gradual increase | When the increase is significant | Raise 10% now, another 10% in 6 months |
| Value add + price increase | When you want to justify the increase | Add a new feature or service, then raise the price |
| Rebrand / repackage | When you want a fresh perception | New name, new packaging, new pricing — the "new" justifies the price |
| Direct increase with notice | When you have strong relationships | "Starting [date], pricing will increase to [new price]. Here is why and what additional value you are getting." |

### The Price Increase Communication Framework

1. **Give notice** — at least 30 days for existing customers
2. **Explain the value** — connect the increase to improvements, results, or market factors
3. **Offer a loyalty option** — lock in old pricing for a period, or offer an annual plan at a discount
4. **Be confident** — do not apologize excessively; price increases are normal and expected

## Reactivation Campaigns

Lapsed customers are among your highest-ROI marketing targets. They already know you, have bought from you, and just need a reason to come back.

### Reactivation Sequence

| Email | Timing | Subject Line Approach | Content |
|-------|--------|----------------------|---------|
| Email 1 | 30 days after last activity | "We miss you, [Name]" | Acknowledge absence, remind them of value, invite them back |
| Email 2 | 37 days | "Here is what you are missing" | Highlight new features, improvements, or content since they left |
| Email 3 | 44 days | "[Name], a special offer just for you" | Exclusive discount, free month, or bonus for returning |
| Email 4 | 51 days | "Last chance: [offer] expires [date]" | Genuine deadline on the reactivation offer |
| Email 5 | 60 days | "Should we close your account?" | Breakup email — often triggers a response |

### Reactivation Offer Ideas

| Offer Type | Example | Best For |
|-----------|---------|----------|
| Discount | "Come back and get 30% off for 3 months" | Subscription businesses |
| Free extension | "We have added 30 free days to your account" | SaaS / subscription |
| New feature access | "Since you left, we have launched [feature]. Try it free." | SaaS with significant updates |
| Personal outreach | Phone call or personal video from account manager | High-value B2B customers |
| Win-back gift | Physical gift or gift card with a personal note | E-commerce, local businesses |

## Retention Strategies

Retention is the foundation of LTV. Every percentage point improvement in retention compounds over the customer lifespan.

### The Retention Equation

If your annual retention rate improves from 80% to 90%, your average customer lifespan doubles (from 5 years to 10 years), and your LTV roughly doubles as well.

| Annual Retention Rate | Average Customer Lifespan | Relative LTV |
|----------------------|--------------------------|---------------|
| 70% | 3.3 years | 1.0x |
| 80% | 5.0 years | 1.5x |
| 85% | 6.7 years | 2.0x |
| 90% | 10.0 years | 3.0x |
| 95% | 20.0 years | 6.0x |

### Retention Tactics

| Tactic | How It Works | Impact |
|--------|-------------|--------|
| Proactive check-ins | Regular touchpoints before problems surface | Catches at-risk customers early |
| Customer health monitoring | Track usage, engagement, and support metrics to predict churn | Allows preemptive intervention |
| Switching costs (positive) | Integrations, data, customization that make your product more valuable over time | Makes leaving costly (in lost value, not penalty) |
| Subscription / contract | Annual plans, retainers, memberships | Reduces decision points where churn can occur |
| Continuous value addition | Regular feature updates, content, improvements | Gives customers more reasons to stay every month |
| Community | Peer connections, shared learning, belonging | Creates social switching costs |
| Success milestones | Celebrate customer achievements visibly | Reinforces value received |

## Exercises

### Exercise 1: LTV Calculation

Calculate your LTV using the appropriate formula for your business model. Then calculate it by segment (channel, product tier, persona). Where are your most valuable customers coming from? What do they have in common?

### Exercise 2: Ascension Model Design

Map your current product/service ladder. Then design the ideal 4-tier ascension model. What would your Entry, Core, Premium, and Ultra-Premium tiers look like? What would trigger a customer to move from one tier to the next?

### Exercise 3: Pricing Audit

Review your current pricing against the "When to Raise Prices" signals. How many signals apply to your business? If two or more apply, plan a price increase and draft the communication using the framework.

### Exercise 4: Reactivation Campaign

Identify all customers who have been inactive for 30+ days. Create a 5-email reactivation sequence using the templates. Launch it this month and track the win-back rate.

### Exercise 5: Retention Rate Calculation

Calculate your current annual retention rate. Use the Retention Equation table to see how much LTV would improve if you increased retention by 5% and 10%. Identify the top three retention tactics from the table that you could implement this quarter.

## Checklist: Lifetime Value Complete

- [ ] LTV is calculated using the appropriate formula for your business model
- [ ] LTV is segmented by channel, product, and persona (not just a single average)
- [ ] LTV:CAC ratio is known and is 3:1 or better
- [ ] Ascension model is designed with at least three tiers
- [ ] Ascension triggers are defined and tracked
- [ ] Upsell and cross-sell processes are in place and timed to moments of maximum satisfaction
- [ ] Pricing has been reviewed against the "When to Raise" signals within the last 6 months
- [ ] Reactivation campaign is running for lapsed customers
- [ ] Retention rate is tracked monthly
- [ ] At least three retention tactics are actively implemented
