How to calculate customer lifetime value

LTV: how to calculate customer lifetime value : Customer LTV is one of the most important indicators in marketing, helping to determine the buyer’s interest in the company’s products. It will be useful for anyone who wants to know their profits and understand in which direction the business should develop.

What is LTV, how it can help and how to calculate it – we tell in today’s article.

LTV: what is it

LTV (Lifetime Value) is a metric that reflects the lifetime value of a customer. It shows how much profit the client has brought for the entire time of interaction with the company: from the beginning of the first purchase to the last.

On the Internet, you can find many formulas for calculating LTV, but many of them are quite complex and can take a lot of time to calculate, especially for an unprepared person. For your convenience, consider the simplest option, which is suitable in most cases:

LTV = profit from a client – the cost of attracting and retaining him

What value should be considered good? As such, there is no norm – it all depends on your business. You can rely on the average of other companies in your field.

The final result will be a good benchmark for improving the efficiency of the company. This is especially true for those businesses where customers often make purchases: online stores, food delivery services, and so on.

In addition, LTV will help you understand how much your investment in customer acquisition and retention pays off. If you know the parameters for one client, then they can be easily applied to others. All this will allow you to effectively allocate the budget to attract and retain customers.

Why should count LTV

Above, we considered that LTV is an effective tool that allows you to determine the profit of a company from a particular client.

Along with this, it will help you:

Find loyal customers. You can develop a separate strategy for promoting goods or services for them.
Determine which audience should not be wasted time and money. For example, there are two clients – the first one made a one-time purchase for 100 dollar, and the second one buys goods for 300 dollar every month. On the one hand, the profit from the first client is greater, but after a while the income received from the second buyer will be much higher. Based on this, we can conclude that you need to spend all your energy on an audience that buys goods monthly, and not once.

Understand how much money you need to invest in attracting and retaining customers. Most often, without proper calculations, it is difficult to determine whether it is necessary to reduce or, conversely, increase advertising costs. For example, if LTV = 500 dollars, and expenses are 100 dollars, then you can allow yourself to spend several times more.

Find out which advertising channels bring in more valuable customers. This information should be taken into account when allocating the budget. For example, if LTV from advertising in social networks i.e FB is 300 dollars, and LTV from advertising in search engines is 500 dollars, then it is better to focus on setting up search engine campaigns and other similar tools.

Improve interaction with existing customers. The metric will show you how much more profit a particular buyer can bring. Based on this, it will be easy enough to build an effective strategy for customer retention.

How to increase LTV through email marketing

Newsletters are one of the most convenient tools that allow you to build and maintain relationships with subscribers. The longer a user stays with you, the higher their LTV will become.

At the same time, mailings can increase the average check, the frequency of purchases, and the “lifetime” of the client. Let’s look at a few ways to help you with this.

Method 1: Start a mailing list with recommendations

Users often leave abandoned items in their shopping carts that they forgot to pay for for some reason. You can send a reminder to the customer and convince them to make a purchase. This can be done using recommendations based on user preferences. Such mailing will help not only to get more orders, but also to increase the average bill.

You can also send recommendations after the user has already made a purchase. For example, a customer ordered some of the company’s products on December 8, and the goods will only be shipped on December 12. During this period of time, you can offer a selection of useful products that will be included in the same package. Thus, the client will save on delivery, and you will increase the average check.

Method 2: Sending a Purchase Reminder Email

This method will help you increase the frequency of purchases. It works as follows: you send a newsletter to your customers, in which you tell them that the goods they are interested in are running out. For example, if a user regularly buys children’s products, then the information that these products are running out will definitely stigmatize him. Most likely, he would rather order it so as not to be left with empty pockets.

Another option to increase the check is to offer the client related products. For example, a user bought a phone from you, and for this action you send a newsletter with accessories: covers, chargers, and so on.

Method 3: Customer retention through support

If you want the customer to always stay with you and not leave after the first purchase, you should take care not only about the quality of the product. It is important that the buyer is always satisfied with the purchase of a product or service.

For this you can:

to say that they are always ready to answer questions;
demonstrate how to work with the product using step-by-step instructions;
engage in interaction with the company through social networks.

Conclusions

LTV is the most important indicator in marketing, which allows you to increase the average check, the frequency of purchases and the “lifetime” of the client. To do this, you can use mailing lists, where product recommendations or instructions for improving interaction with the product will be provided. There is no ideal LTV value, it depends on the specifics of the business. However, you can take the average result among similar companies and build a marketing campaign to increase the indicator based on them.