Defining Lifetime Value

Lifetime value (LTV) refers to the total dollar amount a customer spends with your business over the lifetime of your relationship with them. In other words, it's how much a customer is worth to your company in the long run.

Measuring LTV

There are a few ways to calculate LTV:

• Revenue per year x Average customer lifespan in years: This simple method multiplies how much revenue you generate from a customer each year by the average number of years they remain a customer.

• Revenue per year x Gross margin x Average customer lifespan: This also factors in your gross margin, which is the profit margin after accounting for the costs of goods sold. The higher your margins, the higher the LTV.

• Discounting future revenues to today's dollars: This advanced method calculates the present value of the future revenues you expect to generate from a customer over their lifetime. You have to make assumptions about revenue growth and attrition rates.

Why Is Lifetime Value Important?

Knowing your LTV helps determine how much you can spend to acquire new customers (your customer acquisition cost or CAC) while still making a good return. In general, you want your LTV to be 3-5 times higher than your CAC. LTV also shows you which types of customers are the most valuable so you can focus your marketing efforts on them.

In summary, LTV is one of the most important metrics to understand for any business. Monitor it regularly and use it to drive key strategic decisions. Your bottom line will thank you.

1) Customer retention

The longer you keep a customer, the more they’ll spend. Focusing on LTV encourages you to keep customers happy so they stick around. Things like great service, quality products, and loyalty programs are key.

2) Higher profits

When you know a customer’s LTV, you can determine how much to spend to acquire them as new customers. Spending too little means missed opportunities for new clients. Spending too much cuts into your profits. Understanding LTV helps you strike the right balance.

3) Improved targeting

Knowing your customers’ LTVs lets you target the most valuable segments. You can tailor marketing, products, and service to keep those customers delighted and engaged. This focused approach is far more effective than a one-size-fits-all strategy.

Calculating a Customer's Lifetime Value

To calculate a customer's lifetime value (LTV), you'll need to determine a few key metrics. First, calculate your customer's average purchase value by totaling how much they spend with your company in a given time period (like a year) and dividing it by the number of purchases.

Next, determine your customer retention rate, which is the percentage of customers that continue to purchase from you over time. For example, if 50% of your customers from January are still buying from you in December, your retention rate is 50%.

Then, estimate how long your average customer continues purchasing from you. This can vary greatly depending on your industry, but for many companies 3-5 years is typical.

Finally, calculate your profit margin, which is how much profit you make on each sale after accounting for costs.

To determine LTV, multiply the average purchase value, retention rate, average lifespan, and profit margin.

For example, if your customer spends $200 per purchase, you have a 50% retention rate, your average customer sticks around for 4 years, and you have a 20% profit margin, the LTV would be:

$200 x 50% x 4 years x 20% = $800

How To Increase Lifetime Value

Once you have a better understanding of lifetime value, the next step is to determine how to increase it. Here are a few effective ways:

1) Provide exceptional customer service

Give your customers an experience that keeps them coming back. Respond to questions and concerns quickly, offer personalized support, and go above and beyond their expectations. Happy customers are loyal customers, so focus on building goodwill.

2) Offer a loyalty program

Reward your repeat customers for their business. Discounts, special promotions, and coupons are all ways to show you value them. Giving customers an incentive to buy from you again is key to boosting lifetime value.

3) Continuously improve your products

Don’t rest on your laurels. Keep enhancing your products and services to give customers more reasons to stick with you. Seek out customer feedback using in-app surveys to gain useful insights into what they want and ways you can better meet their needs. Lifetime value increases when you give people more value over time.

4) Provide upsells and cross-sells

Once someone makes a purchase from you, suggest complementary products or services they may be interested in. For example, if they buy a phone from you, offer a case and charger to go with it. Look for natural pairings or bundles within your product line that will increase the customer's lifetime spend.

Following these strategies can significantly impact your customer lifetime value and build a sustainable, profitable business. Focus on the long game of customer loyalty and lifetime value will follow.