The Complete Guide to Customer LTV (Lifetime Value) in Marketing
To maximize your business’s growth – and prioritize your most valuable shoppers via your marketing efforts – you need to understand how much each existing customer’s potential worth is. That means understanding their LTV or customer lifetime value.
Not sure how to measure it or why it’s important for your business? Read on for a detailed explanation of customer lifetime value and how to boost it for your brand’s long-term success.
LTV or lifetime value is the expected amount of money the average customer spends while shopping with your brand. It’s not what a customer spends in a single purchase – it’s what they are likely to spend over all the times they shop on your site or subscribe to your services.
In other words, it’s the lifetime value or total revenue a single customer can be expected to provide to your business. Understanding your brand’s average customer’s lifetime value is highly important and can help your brand thrive, especially in competitive niches.
You can identify your average LTV with a fairly straightforward formula:
In the above formula, “customer value” is the average amount of money a customer spends with your brand. You can find this by looking at your sales revenue and determining the average purchase value on your website.
So, if the average customer spends $50 at your store, the average customer value is also $50. Average customer lifespan, of course, is the average number of purchases a customer makes according to your recorded data. So, if the average customer makes two purchases, then doesn’t return to shop on your site, the average customer lifespan is “2”.
Plug those numbers into the above formula, and you get:
The CLV in the hypothetical scenario above is $100. However, remember that what constitutes a “good” lifetime value is contingent upon how much you spend to acquire and retain each customer, your operating expenses, and various other factors.
LTV matters because it costs more money to acquire a new customer than it does to retain a customer, on average.
In the earliest days of your business, every dollar you spend counts. The more money you have to spend on marketing, the more money you need to make to turn a profit. It is very expensive to convert one lead into one customer. With a higher LTV, you’ll make more money overall when accounting for marketing and other operating expenses.
It’s always a good idea to increase your LTV since it maximizes how much money you get from every acquired customer. The lower your LTV, the more money you have to spend to break even or stay “in the black.”
While a “great” LTV varies from business to business based on each brand’s revenue, operating expenses, and other metrics, your customer lifetime value should generally be three times more than the customer acquisition cost or CAC. So, your LTV should be three times as much as it costs to get a new customer.
Say that your average customer acquisition cost is $100. It takes about $100 for you to acquire a new customer (i.e., for them to make a purchase or sign up for a subscription).
For your LTV to be “good,” it would need to be $300, give or take. If your average LTV isn’t three times your customer acquisition costs, you may not make enough money to scale your business reliably.
Given that LTV is so crucial, it’s a good idea to figure out how to improve your average LTV as soon as possible. Fortunately, there are lots of ways to boost your LTV. Digital marketing experts like MuteSix can help with many of these methods, including:
Since there are many ways to boost your LTV, as well as customer loyalty platforms to partner with, it’s a good idea to partner with an industry-leading marketing agency with experience in this area. Fortunately, MuteSix can help partner you with the best customer loyalty platforms and strategize the most effective LTV-boosting solutions for you.
Ultimately, customer lifetime value is a core metric you can’t afford to ignore. You should prioritize calculating and analyzing the LTV for all your major leads and customers. Once you have a solid grasp of your average customer LTV, you can adjust your paid media strategies so as to boost the value-add of existing customers.
At MuteSix, we use real-time data to inform content and paid media solutions that build brand equity and convert shoppers and retain them to boost customer LTV. Contact us today to see how we can help.
What is Customer Lifetime Value (CLV)? Definition and Guide | Shopify Blog
Customer Acquisition Cost (CAC) – Definition, Formula, and Example | Corporate Finance InstituteHow to Calculate Customer Lifetime Value | Hubspot Blog