When it comes to measuring the success and predicting the potential of a business, Lifetime Value (LTV) is single-handedly the most important metric to be considered within any marketing budget.
What is LTV?
LTV (also known as Customer Lifetime Value, CLV, CLTV, or LCV), is essentially a prediction or calculation of the potential revenue generated by a customer in a relationship with a product or service, which is approximated based on the trends, deal prices, and behaviors of the average customer.
For example, LTV seeks to help an app developer understand the average revenue generated by each user of their app for the duration of their activity on the platform.
How is LTV calculated?
Lifetime value of a customer is calculated through the analysis of a few key metrics within the average customer's behavior.
- Average purchase value (How much does the average customer spend?)
- Average frequency of purchases (How often do customers make purchases?)
- Average customer lifespan (How long do customers stay customers?)
If you know these averages, then LTV is easily calculated.
Here's a simple calculation based on the inputs above:
Average Purchase Value x Average Purchase Frequency = Average Customer Value
Average Customer Value x Average Customer Lifespan = Lifetime Value (LTV)
Why is LTV important?
LTV is simply the most important metric within a marketing budget because it helps businesses make long-term projections against their marketing plan and enables marketers to scale/optimize campaigns rapidly and effectively.
According to a recent study on customer lifetime value, businesses that actively monitor and track this metric typically experience the following benefits:
- 81% of companies gain more sales
- 68% of companies increase customer retention
- 56% of companies encourage brand loyalty
- 52% of companies create more timely marketing
- 41% of companies have greater personalization for customers
Companies that have a strong grasp on the LTV of their customers are better equipped to identify and focus on points of optimization that will impact the growth of their organization.
For example, if an app has a long user lifespan and high rates of user activity, but very low purchase value or low frequency of purchases, then the app developers can build strategies to encourage more purchasing activity.
Understand that LTV is an estimate
LTV is based on average behavior and trends of customers, which means that it is inherently an approximation of potential revenue. There are always outliers to any average and it is important to consider how this might be affecting the perspective on your LTV. Furthermore, it's critical that marketers constantly update and review their LTV calculations as any developments to an app or product can impact the factors that contribute to LTV.
While LTV is never 'set in stone', it is still a critical metric in the development of any effective marketing plan. It's best to avoid making large scale marketing decisions until you have clarity on the LTV of your customers.