What is Lifetime Value (LTV)?
Customer Lifetime Value is one of the most important metrics for any business. Lifetime Value is essentially how much money a customer brings to your time throughout the entire time that they remain a customer.
The main purpose of Life Time Value is to tell us how much a customer is worth. Through LifeTime Value, you decipher the overall value of each customer and, in turn, give you an idea of how much should be spent on customer retention in that regard.
In addition, the Life Time Value also allows you to establish whether or not you can expect specific customers to become repeat customers! If Life Time Value is high, it means that the customer in question is likely to buy from you again. Contrarily, if Life Time Value is low, it means that the customer is not likely to buy from you in the future.
Calculating Lifetime Value
According to Profit Well, the simplest way to calculate Lifetime Value is to multiply the average revenue a customer generates over a given period of time (month or quarter) by the average length of the contract. Another simple formula is Life Time Value = ARPU / Revenue or Customer churn.
Why is Lifetime Value Important?
Regardless of the size of your business, you need to pay attention to Life Time Value. This is because, to be successful, a business needs customers that spend more money on their brand than it took to acquire them. Your Life Time Value needs to be higher than your CAC (customer acquisition).
In case that doesn’t happen, it means your business is losing money with each new customer. Needless to say, that is quite detrimental to your business and in fact, defeats the very purpose you’re putting in the effort.
Do remember that it is okay for your Life Time Value to be lower at certain times, but it is only acceptable when you are covering those losses eventually through revenue sharing, features, and new products.
Additionally, Life Time Value also means additional revenue through retention. Not only that, but it is also the ultimate method to incentivize repeat customers when you have the LifeTime Value in perspective.
So, if a business wants a more profitable path to revenue and an increase in customer loyalty, they will take Life Time Value a lot more seriously!
Life Time Value Best Practices
To make the most out of LifeTime Value, these best practices can come in handy.
- Invest in customers who require little maintenance and support.
- Get rid of customers that are costing you more to maintain than they are paying to be customers.
- Increase customer satisfaction to increase LifeTime Value.
- Measure customer satisfaction and loyalty with an NPS program.
- Segment customers to get better LTV readings.
- Use predictive modeling to estimate LTV.
- Improve customer service.
- Create as many engagement points as possible.
- Develop a recurring payment (subscription) model.
The Bottom Line
In conclusion, LTV is one of the most important metrics of a business. You need to know and understand which customers are worth focusing on, and which ones would be better to not focus on! This way, you can ensure profits and that your resources are not wasted.
Figuring out the LTV should be the core practice in all organizations! Moreover, you should be working towards getting a higher LTV all along because, at the end of the day, that is what signifies how well your business is doing in the grand scheme of things.