Today we’re going to talk about Customer Lifetime Value (LTV).
Even though it’s one of the most important metrics, most companies ignore it.
I can’t stress enough how important it is to know your LTV.
Some of you who aren’t newbies in business, you already know how important it is to keep track of your LTV.
But, those who are just joining, can’t answer why it’s critical to know.
Your LTV helps you determine the worth of your customers and allows you to make the right decisions for KPIs – especially for acquisition since you’ll understand the real costs to acquire new customers.
It helps with maximizing the value of existing customers, determining revenue generated from specific customers, and segmenting the categories of customers by identifying patterns that your most profitable customers have in common.
And all of the above helps with better aligning your messaging to acquire more valuable customers.
So how do you calculate your LTV?
There are few metrics that contribute to the calculation of CLV:
- Average Order Value (AOV)
- Purchase Frequency (PF)
- Customer Value (CV)
- Average Customer Lifespan (ACL)
You need to look at each metric individually to understand what ones need more attention to maximize profitability.
Generally, when doing these calculations you look back 1 year or a lifetime, depending on how long you are running your business.
- AOV = Total Sales Revenue / Total Number of Orders
- PF = Total Number of Orders / Total Number of Unique Customers
- CV = Average purchase value * Average purchase frequency rate
- ACL = averaging the number of years a customer continues purchasing
- CLV = Customers Value * Average customer lifespan
This will give you your revenue you can reasonably expect an average customer to generate for your company throughout their relationship with you.
Customers Lifetime Period
It’s also good to calculate the Customers Lifetime Period, however for this you’ll need to calculate the Churn Rate as well which is a bit more complicated, but taking the simple calculation it would be:
Dividing the total customers beginning of x period – customers end of the x period/customers beginning of the x period.
Customer Lifetime Period = 1/Churn Rate
Knowing your customers LTV is highly valuable on your acquisition strategy. You’ll know exactly how much you can spend to acquire a new customer.
Once you’ve calculated your LTV, the next step is to improve the number.
To improve, you need to look at your average order value and customer loyalty.
Customer loyalty takes time to build and depends on the business model, but there are other ways to encourage customers to spend more.
One is to increase AOV. A few ideas are: free shipping, bundles, upsell/cross-sell.
While increasing repeat Customers Loyalty generally reward programs work well.
I hope this post was helpful for those who never calculated the Lifetime Value of their customers. I would love to hear your opinions on this post, or your input if you are already implementing the above so those who are missing out will hear more feedback on the true values of calculating LTV.
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