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Customer Lifetime Value is an important metric or an estimate, which every business owners should be aware of. As it predicts the customer’s relationship with the business, you can determine the profit of your business. You can also determine the suitable marketing channels and its usage in a long run. This value will make changes in every part of the business. To get more information, visit https://www.marketingstrategy.com/ltv/
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Lifetime Value: Understanding The Metric That Drives All Marketing
Context • Introduction • Basics • Lifetime Value’s Advantages over Cash In, Cash Out • Calculating Lifetime Value • Lifetime Value Analysis • How much you can spend on acquiring a customer?
Introduction • Customer Lifetime Value is an important metric or an estimate, which every business owners should be aware of. • As it predicts the customer’s relationship with the business, you can determine the profit of your business. • You can also determine the suitable marketing channels and its usage in a long run. • This value will make changes in every part of the business.
Basics • Lifetime Value (LTV) in simple terms is a guess which shows how much a person can spend on your products or services. • LTV will be changing depending on time and the customers. Hence one cannot determine that the before value will continue for next years. • With the help of Lifetime Value, you can conclude that - How much you can spend to gain a customer - The potential of the customer - How much you can earn from a single customer and much more
Lifetime Value’s Advantages over Cash In, Cash Out • In Cash In, Cash Out, you cannot determine the results at initial stage. • For example, consider you are investing $45 in a customer and you get the desired profit only in the 4th month. • In such cases, if you calculate the cash flow for only 2 months, then it obviously considered as a loss and you eventually give up with it. But it is a successful attempt, if you consider a lifecycle.
Calculating Lifetime Value • Calculating the Lifetime Value is quite a difficult task, as the customer’s behaviours are hard to predict. But when you try to gather and figure out the customer data, it is relatively simple. • Formula for calculating the Lifetime Value is Transaction Value x Number of Transactions x Profit Margin Or for subscription business Monthly Revenue x Number of Months x Profit Margin • A Good Lifetime Value is the value that should be 3 to 5 times more than the amount that you spent on acquiring that customer.
Lifetime Value Analysis • As the customer’s interest and behaviour changes over time, you Lifetime Value also changes over time. Cohorts allows you to analyse and measure these changes over time. • Cohorts is the way of measuring the LTV in groups. Instead of measuring the value based on a single customer, cohorts allows you to group the customers based on the time. • Using cohorts analysis you can derive - How much a customer likes to spend on your goods and services? - Are they spending less or more? - Is your marketing getting better?
How much you can spend on acquiring a customer? • Based on the rule, you can spend 35% of your calculated LTV to acquire a customer. Most important metric that you need to consider is the Payback Periods. • You can also spend 100% of the Lifetime Value in acquiring a customer, but you need to put lot of efforts like branding, referrals and much more. • Spending 100% of the value sometimes will not get you profits, but it gets you experience and feedbacks from the customer on the possible improvements.
