Ep 70: The #1 Business Metrics You Need to Know & How to Calculate It

Jun 20

The #1 Business Metrics Your Need to Know & How to Calculate It

Cracking the Code: Maximizing Member Lifetime Value

Whether you're a membership site owner or aspiring to become one, the number we will be discussing today is crucial in order to understand the true value of your customers: Member Lifetime Value or LTV. In a recent conversation with a client, we discussed how important this number is to businesses. It holds the key to unlocking growth, profitability, and long-term success.

While LTV holds immense importance for all businesses, we'll be specifically focusing on its significance for membership site owners. The unique nature of membership sites, where revenue is spread out over an extended period, makes understanding LTV even more critical. By delving into the world of LTV calculations, we'll equip you with the knowledge and tools to make strategic decisions that drive the growth and sustainability of your membership site.

So, whether you're a seasoned membership site owner or just starting out on this entrepreneurial journey, get ready to uncover the power of Member Lifetime Value and learn how to calculate it.

What is Member Lifetime Value (LTV)?

Lifetime Value is looking at the average amount that you are going to make from each customer in your business. So you can look at this just for one product line, like your membership. For example, I have a membership that is $50 a month. I want to know what the average lifetime value is of members coming in the doors.

Now, if you have higher level programs,like a one-on-one coaching offer for your membership, or a mastermind, then you can actually look at an LTV or a lifetime value of customers across all of your programs. We're going to keep it really simple because I want you to be able to calculate this on the back of a napkin.

So for our example today, LTV represents the average amount of revenue you can expect to generate from each customer throughout their lifetime as your customer. For membership site owners, this metric becomes even more critical because the revenue from new customers is often spread out over an extended period. Unlike one-time purchases where immediate returns are evident, membership sites rely on a continuous revenue stream that grows over time.

Importance of Lifetime Value to Membership Site Owners

When it comes to membership sites, understanding LTV becomes even more critical. Unlike other products or services where you receive immediate payment upon purchase, membership sites operate on a recurring revenue model. As a result, you only receive a small portion of the LTV right away, making it essential to grasp the long-term value each member brings.

Let's illustrate this. Suppose your membership site charges $50 per month, and on average, customers stay for about 10 months. So, in total, you can expect to generate $500 from each member. In the first month, you'll only receive $50. Are you comfortable spending $100 to acquire a customer when you'll only earn $50 in the initial month, potentially breaking even in the second month? This is where the LTV number proves its significance, particularly for the marketing side of your business.

The LTV metric serves as a crucial link between the fulfillment side, which focuses on community retention and providing value, and the marketing side, which aims to acquire new customers. It aligns both aspects by highlighting the long-term impact of your marketing efforts and the potential return on investment. By understanding the LTV, you can make informed decisions about your marketing budget, customer acquisition strategies, and overall business profitability.

Calculating LTV Simplified

To calculate LTV, you need to know your retention rate, which measures the percentage of customers you retain over a given period. If you haven't already, I want you to go back to episode number 35 where I teach you how to calculate your retention rate because you're going to need to know your retention rate in order to calculate your lifetime value of your members. Once you have your retention rate, calculating LTV becomes straightforward .

Calculate Retention Rate:

Retain your customers for a specific period, such as a month, and determine the percentage of customers who remain active. For example, if your retention rate is 90%, it means you retain 90% of your customers or .90.

Calculate Churn Rate:

Churn rate represents the percentage of customers who leave during the specified period. To calculate churn rate, subtract your retention rate (.90) from 1 Using the example above, your churn rate would be .10 or 10%.

Churn= 1 - .90= .10 or 10%

Determine Average Length of Stay:

Take the inverse of your churn rate to find the average length of stay. For instance, if your churn rate is 10%, the average length of stay would be 1 divided by 0.1, which equals 10.

Avg. Length of Stay= 1/.10= 10 months

Calculate Lifetime Customer Value (LTV):

Multiply the average monthly revenue per customer by the average length of stay. For example, if your monthly membership fee is $50 and the average length of stay is 10 months, the LTV of your customer would be $500.

LTV= $50 x 10 months= $500

The Power of Knowing LTV

Do you see how knowing the lifetime value of a member that is $500 can impact how much you're willing to spend on the marketing side to acquire a new customer? On the marketing side, you should be thinking about cost per acquisition (CPA), which is the cost to acquire a new member. Often we struggle with this because we are looking at the immediate return on investment.

The online space is the only place where people think that they could actually break even or be profitable in month one. It's okay to lose money or not be profitable right away, if we can truly understand the lifetime value. If I was only willing to pay $45 to get a member because I wanted to be profitable that first month, I'm really limiting myself. I need to look at it as most of my members, I will make an average of $500.

I need to ask myself if I would be willing to spend $100 to acquire a member if I knew that I would make $500, or would I be willing to spend $150 and wait three months to be profitable? Understanding your member’s LTV has major implications for your business. It allows you to make informed decisions regarding marketing investments and cost per acquisition. While profitability in the first month may seem crucial, knowing the LTV empowers you to make long-term decisions that drive sustainable growth.

Unlocking Opportunities with LTV

Calculating your LTV doesn't have to be complicated. In fact, I've created a FREE LTV Calculator that simplifies the process and allows you to explore different scenarios. You can access the calculator at memberltv.com and discover how increasing your retention rate can boost your LTV. I encourage you to calculate your average LTV and send me a DM @shanaspeaks with your numbers. The insights gained from this exercise can unlock immense potential and help you make more strategic decisions for your business.

The Member Lifetime Value is a critical metric that every entrepreneur should be familiar with, regardless of their industry. By understanding and calculating the LTV of your customers, you can optimize your marketing strategies, improve profitability, and enhance community retention. Be sure to take advantage of my FREE LTV calculator and unlock a deeper understanding of your business's long-term value. Remember, knowing your numbers is key to unlocking growth and success.