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Lifetime Value (LTV): what it is, how to calculate it and why it is key for your startup

Marketing specialists tend to calculate the return on investment of their campaigns or to perform an analysis of metrics such as the CTR, the bounce rate or the customer’s journey in the conversion funnel. However, a data such as the customer’s Lifetime Value is also key to a marketing strategy.

Customer Value, which is called Customer Lifetime Value (CLV) is a super important variable. Lifetime Value is the term used to determine the value that a customer contributes to a business throughout the life of the company.

It is a very important metric and is used to make decisions about sales, marketing, product development or customer support. When applying the Customer Lifetime Value, marketing specialists can obtain the necessary data to determine the real value of a client based on its relationship with the brand.

It is difficult to predict how long each relationship will last, but this calculation allows a good estimate to be made. It is a useful metric used by marketing specialists, especially at the time of acquiring a client.

The basic formula to calculate the Lifetime Value

To calculate the value of the customer’s useful life, which predicts the total revenue that a company can reasonably expect from a single customer account, you must calculate the average purchase value.

With this data you must then subtract the average purchase frequency rate from that number to determine the value of the customer. Ideally, a customer’s acquisition cost (CAC) must be less than the Lifetime Value (LTV). It’s supposed to cost you less to capture a client than what you get from it. The formula would look like this:

Average Expense x Cost of Acquisition x Life Client = Lifetime Value

Once you know the Lifetime Value, you can already know how much you can afford to spend as a company in paid advertising. In Facebook ads, YouTube ads, Google Adwords, etc. That is, what you can afford to acquire a new client.

Breaking down the Lifetime Value formula

Calculate the average purchase value: calculate this number by dividing your company’s total revenue over a period of time (usually one year) by the number of purchases over the course of that same period of time. The next thing is to calculate the average purchase frequency rate: calculate this number by dividing the number of purchases over the course of the time period by the number of unique customers who made purchases during that time period. Calculate the value of the customer: calculate this number by multiplying the average purchase value by 1 and subtracting the average purchase frequency rate from that number. Calculate the average life of the customer: calculate this number by averaging the number of years a customer continues to buy in your company. Then, calculate the Lifetime Value by multiplying the value of the client by the lifetime of the client. This will give you an estimate of the amount of income you can expect an average customer to generate for your business throughout your relationship with him.

The value of the data obtained

When calculating the CLV, there are many nuances to consider depending on the specific questions you want to obtain from that data. But, the customer’s lifetime value formula can be complicated as you want more data:

The Value of Life of the Client (LTV) is one of the most important metrics in any growing company. By measuring the LTV in relation to the cost of customer acquisition, companies can measure how much time it takes to recover the investment required to earn a new customer. As for example, the cost of sales and marketing.

The metric itself tells companies how much revenue they can expect a customer to generate during the course of the business relationship. Something in which customer support and sales and marketing departments have direct influence.

The departments involved play key roles in solving problems and offering recommendations that make customers decide to be loyal to a company or not. Therefore, the longer a customer continues buying at a company, the higher their Lifetime Value will be.

What value does each department get thanks to the Lifetime Value obtained?

The Lifetime Value is one of the most important metrics to understand your clients. Or at least to know your consumption habits in your company. The Customer’s Life Value helps you make important business decisions about sales, marketing, product development and customer service. Here you have a clear example:

  • How much should I spend to acquire a client?
  • How much should I spend to acquire a client? Product: How can I offer products and services adapted to my best clients?
  • How can I offer products and services adapted to my best clients? Customer service: How much do I have to spend to service and retain a customer?
  • How much should I spend to serve and retain a client? Sales: What type of customers should the sales department spend more time trying to acquire?

When calculating the Lifetime Value of your users you will realize that not all your customers are the same or have the same buying behavior in front of your company. When calculating the Lifetime Value you can find opportunities to innovate in customer segmentation.

To simplify this process, you can segment the lifetime values of your customers. Knowing your types of clients will allow you to focus on more specific marketing strategies.

You may be spending most of your budget on unique buyers, which is not good for your business. Segmenting your customers will give you a better idea of where your most profitable customers are. Regular customers should be the center of your strategy. Those that have the highest rate of purchases.

Focus on the most profitable and loyal customers

The best thing about knowing who your most profitable type of client is is that you can know the type of client and apply loyalty marketing strategies. Offering benefits to the most loyal customers is the best way to improve the Lifetime Value.

There are some good practices when it comes to establishing loyalty programs. This will help you make sure your customers easily understand the value of being part of your company. Here are some ways to apply marketing strategies that improve your brand community:

1.- Private sales

Now that Christmas is approaching for example, many brands use private sales as a way to reward their most loyal customers. It is about offering a few people discounts for a limited time.

These discounts are usually carried out in periods where there really should not be. That is, one week before Black Friday, before the sales or even in full shopping season. It is a way to reward those customers who usually tend to buy your products.

2.- Discount codes through email marketing

Another of the usual tactics is to send promotions and discount codes through email. This type of actions also increase sales. It’s as simple as segmenting your database and sending a few discount codes to a few users.

A code that is usually inserted when making the payment on your website. These types of promotions can be sent not only to regular customers but also to those that you think are about to become habitual.

3.- Remarketing

For this type of customers even a remarketing campaign can work. It is a question of reminding those users of the product they were about to buy. Remarketing strategies do not work with all types of customers.

You must apply this strategy to the usual ones. Loyal customers are those who will receive the impact of remarketing. For others this type of strategy will go totally unnoticed. There are different types of remarketing ads. Find the one that best suits your needs.

To set up a remarketing campaign, you need to add a remarketing tag to your website or landing page. A cookie or otherwise, you will not be able to capture those users. Cookies allow you to intercept users who stayed at the doors of the purchase. Here are some examples

What else can be done to improve the Lifetime Value?

One tactic may be to create a better content to accompany the customer’s trip. In particular, personalized content. More than ever, organizations have increasingly concrete data that provide unique information about customers across all channels. And also in real time.

The intelligent use of these data to organize relevant and individualized marketing content and create positive customer experiences has been shown to improve the Lifetime Value.

Also published on Medium.

Published inStartups

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