Unlocking growth: how to calculate Partner Lifetime Value (PLTV)
It’s no secret that most business-to-business (B2B) companies use partner ecosystems to expand their reach, access new markets, and accelerate their sales cycles. In recent years, partnerships have increasingly become a cornerstone of successful go-to-market strategies, especially in the B2B space. But how can a business determine if a partnership is driving the growth it expects or if the partnership is actually a drain upon valuable business resources?
By calculating Partner Lifetime Value (PLTV).
What is PLTV?
PLTV is a fairly simple calculation (yes, math, but don’t be scared!) that estimates the total revenue a partner will generate for a business throughout the entire relationship. By calculating PLTV, businesses can gain valuable insights and an understanding of long-term profitability, which helps go-to-market (GTM) teams prioritize resources, refine their strategies, and ultimately achieve revenue growth.
Calculating Partner Lifetime Value
There are a couple of different ways that organizations can calculate PLTV. The specific inputs used will vary depending on a company’s business model, partnership structure, and, ultimately, what the business is trying to learn. However, here's a general framework that fits most business use cases:
1. First, define and identify key metrics:
While each business may find that the key metrics that matter differ, here are a few standard inputs that appear in the most common formulas used to calculate PLTV:
Average Revenue per Partner (ARPP): This is the average annual revenue generated by a partner. It can be calculated by taking the total annual partner-sourced revenue and dividing it by the total number of active partners.
Partnership Costs (PC): Partnership costs are exactly what they sound like: the cost of maintaining the partnership for a business. This can include the costs of training, marketing materials, campaigns, and more.
Discount Rate (DR): A discount rate is the interest rate that a business uses to compare the value of future cash flow to today’s value.
2. Choose a formula:
Depending on the specific business needs and data availability, here is a common PLTV formula: PLTV = ARPP - PC/DR
3. Gather Data:
Once a formula has been established, it’s important for a business to actively collect the data needed to complete the calculation of choice.
Sales & CRM Data: Sales and customer relationship management (CRM) data can and should be used to identify partner-generated revenue and track partnership lifespans. This may require optimization of whatever platform the business is using to ensure that this data can be collected effectively.
Partner Portal Data: Many partner portals provide valuable data on partner activity, engagement, and performance. It’s important to note that partner portals are what you make of them, so if a business has not spent the time to build out and update its partner portal, it may not provide the needed data to calculate PLTV.
Internal Surveys: Surveys can help businesses gain information that software as a service (SaaS) applications can’t, specifically qualitative data to help them understand partner satisfaction and identify areas for improvement (more on this below).
Beyond a formula: enriching PLTV analysis
While a formula provides a starting point, a robust PLTV analysis goes beyond basic calculations and incorporates data that can’t be simply plugged into an equation.
One factor that should be considered is partner profitability. The cost of partner onboarding, training, and ongoing support can reduce a partnership's overall revenue success. Organizations should track these metrics from both a cost and time perspective to understand the actual profit margin for deals coming from a particular partner.
Another factor to add to the mix is partner tiering. Tiering systems allow businesses to categorize their partners based on factors of their choice, but often, the higher the tier, the more revenue potential a partner in that tier has for a business. Tiering systems help with resource allocation and ongoing partner support prioritization. While PLTV calculations might initially help determine what tier a partner falls in, ongoing monitoring of that calculation may lead to partners moving up and down in tiers, which in some cases may save business resources, aka money.
Lastly, there are qualitative factors (I told you we’d bring these up again) that are incredibly valuable to use when evaluating a partnership but aren’t necessarily numbers. Partner satisfaction, strategic fit, type of partner (for example, software vs. hardware), brand alignment, and more can be obtained by surveys, feedback, and other methods and should appear in any partner success conversation. Partner maturity models may also play a role here.
After calculating PLTV, how should it be used?
By incorporating PLTV into a partner ecosystem management strategy, businesses can reap significant benefits, including:
Improved resource allocation: After determining a partner’s value for a business, teams can direct resources toward high-value partners who generate the most revenue over time.
Streamlined partner recruitment: Using a few general data points, GTM teams can direct their focus to recruiting and onboarding partners with the potential for high PLTV.
Partnership optimization: PLTV can help organizations identify areas to improve partner performance and engagement, fostering mutually beneficial relationships.
Improved financial forecasting: With great data comes great responsibility. Organizations can use PLTV to help them hone in on their sales and marketing forecasts for the year to help establish more realistic and informed goals across the business.
Partner Lifetime Value is a great way to assess the health of your partner program and use data to your advantage to achieve greater revenue success and more.
Need help calculating your business’ PLTV for a particular partner or for your entire ecosystem? Knack can help with this and help your organization create programs that will drive greater PLTV for you and your partners. Chat with us here to get started!