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Minute Monday #5: LTV for freemium models
Do you have a PLG freemium motion?
Curious about unit economics for Product Driven Revenue?
Here’s the simple way to calculate how much every free is user worth to your business.
Lifetime Value (LTV) is a key unit economics metric that represents how much revenue you can expect to derive over the lifetime that the unit (usually customer) remains a paying customer.
For PLG companies, it's a useful exercise to understand your free user LTV; the revenue that you can expect to derive from every free user that signs up for your product.
Knowing the free user LTV and other unit economics metrics of your PLG business is (amongst other things) absolutely critical in planning investment in new user acquisition and better understanding the performance of your free plan.
Here's a walkthrough on calculating free user LTV using a simple example...
We start with the following input metrics:
200,000 free users
1000 paying customer accounts
$50M ARR of product driven revenue
10% trailing 4Q churn rate
And we calculate as follows:
Free user to paid account conversion rate = (1000 / 200,000) * 100 = 0.5%
ARPC per year = $50M / 1000 = $50,000
LTV Period = 100% / 10% = 10 years
LTV of a paying product driven customer = $50,000 * 10 = $500,000
LTV of a free user = 0.5% * $500,000 = $2500
Further segment your analysis this by acquisition channel cohorts to unlock deeper insight.
IMPORTANT NOTE: All revenue figures should be the subset of product driven revenue (i.e. revenue from customer accounts where there was meaningful activity in the product BEFORE any sales contact).
Do NOT include any revenue that was derived from the outbound sales motion - doing so will artificially inflate your free user LTV.
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