Jim answers questions from fellow Drillers
(More questions with answers here, Work Overview here, Index of concepts here)

Topic Overview

Hi again folks, Jim Novo here.

LTV has to be actionable.  If  you can’t take action on the information, it’s not relevant anyway.

There you go, the most universally true rule when attempting calculation of LTV.

And the best / easiest way to accomplish this is to identify similar customer behaviors and segment the customers by these behaviors – THEN figure out LTV by segment.

If you can’t actually take action on the information, then why spend countless $$ and hours fussing over all the reasons the number you come up with might be wrong and trying to solve unsolveable data or corporate issues? The best idea to implement when developing / using LTV is consistency – let’s get the team to agree on what LTV is and how to measure it, stick with those ideas for at least several years, test and take action on the results to uncover value, THEN (perhaps) discuss improvements!

Q:  I have just been reading your series on Comparing the Potential Value of Customer Groups. I am having trouble calculating the lifetime value of our customers.

A:  Yes, well, everybody does for some reason!  Often the problem is too much
focus on trying to look at the “average customer” as opposed to segmenting
customers.  By segmenting first, it’s both easier to get to LTV *and* more useful since it’s easier to take action on  a segment than the “average customer”.

Q:  Our company provide accounting software solutions to small to medium sized owner operated  businesses.  Because of what we sell and who we sell to, a lot of our customers are most likely to just buy one or two of our software products and unless they sign up for support (only around 15% do), we may never here from them again.  It is therefore very difficult to determine an average / standard lifetime that customers use our product.

A:  Sure.  First, the 15% segment that does sign up for support sound like good customers to me.  So that’s one segment.  How long do they typically stay signed up?  That’s the average life for this segment.

Then there are probably people who upgrade over time, right?  I can’t imagine an accounting product that people would not upgrade – perhaps not every cycle, but every 2nd or 3rd cycle.  That’s another segment.  Then there are probably some who both follow the upgrade cycle and pay for support.  These are probably the “best customers” and they are a unique segment as well.

And finally, you have the buyer who makes one purchase and you never see again.  These people are also a segment.

Q:  What should I base it on, how long our customers use our products (which would be almost impossible to determine), or how long they spend money with us?  So I measure on average the time between the first and last transaction of customers who have the highest Recency???