ITB #6: A foolproof way to increase LTV
In this week's weekly email, JDM shares a foolproof 3-step process for increasing customer lifetime value.
In today’s email, I’m sharing how to systematically increase customer lifetime value simply by defining it differently.
Let’s cut to the chase:
Lifetime value runs both ways.
It's not talked about enough, but lifetime value isn’t just a mathematical measurement of money collected from customers over time. It’s a description of the relationship.
Most of the time, LTV is bidirectional: we innovate to increase the value to our customers, and we get rewarded with revenue, retention, & referrals.
So far, this is easily categorized as “duh”, but if you follow it to its logical conclusion, it tells you exactly what to do.
Let’s break it down. 👇
Here’s How to increase ltv
By thinking about the lifetime value of a customer as a reflection of their lifetime value of the product, we can hone in on what to do.
1/ Which metrics will most increase our LTV?
Any business can be defined by 6 buckets of metrics: awareness, acquisition, activation, revenue, retention, and referral.
For early-stage companies, there might be but one metric per category. As a product matures and becomes more complex, so do the ways we measure it.
For lifetime value, though, we’re only concerned with those we can measure with the middle section of the metrics — say, from activation or revenue through retention.
Now ask yourself: which metrics will have the greatest impact on LTV? Do you have comparatively low activation rates versus a fairly high churn rate? Do you have too many customers not converting off the free tier?
Pick the metrics that will have an outsized impact.
2/ Find the most efficient knob to tweak it with.
This is the knob you can turn that will have the largest impact on one of those metrics with the least effort.
Those knobs are mostly features in your backlog that increase value for the customer.
If you’re targeting retention on a SaaS platform or a mobile app, these may be the features you can add (or tweak!) that will get you higher engagement. Or it could be a feature designed to increase “stickiness” — a restriction (often leading a double-life as a benefit) that makes it difficult for a user to switch away from you.
Either way, the customer wins, and our hypothesis is that they will reward us with a commensurate increase in LTV, too.
ideate around your metrics;
rank the features by efficiency; and
pick the most efficient feature to play with.
It doesn’t mean anything if you don’t measure it.
Form an hypothesis with an intended lift in the metric measured — with a clear pass/fail. If the experiment succeeds, fantastic! Double-down or move on to the next LTV tweak.
If the experiment fails, you’re forced to ask “what does this mean?” It may mean nothing, but it’s always worth the question. Pivot or persevere?
But you’ll never ask the question if you don’t have a clear hypothesis with a clear go/no-go.
And that’s it. You’ve increased LTV. It’s really hard, but it’s not complicated.
Bonus tip! Only do things that contribute to LTV.
Think about the next few things you’re planning to add into your product, and ask yourself this question: will this drive a measurable improvement in one of our core metrics? If not, delete it from your backlog. It doesn’t matter at all.
Then take it one step further: will this feature have a direct and measurable impact on the metric currently most important to us? If not, throw it in the backlog. It doesn’t matter right now.
In short: don’t waste your time building features that won’t directly contribute to LTV. They’re literally irrelevant.
That's all for this week's newsletter: one tip on how to be a better innovator.
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See you again next week!
Published about 2 months ago