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What Is LTV (Lifetime Value)?
LTV stands for “lifetime value” and is typically used to measure the amount of revenue a company expects to generate from an average customer over the course of their lifetime. LTV is commonly calculated by multiplying the monthly revenue a customer generates by the average number of months they remain a customer.
LTV can be used with CAC (customer acquisition cost) to gauge how much a customer is expected to compared to how much they cost to acquire.
The Importance of LTV
While new customers are important, no company can be sustained by them alone. Instead, the majority of a company’s profitability comes from customers who have already been acquired.
A customer who makes one large purchase and never buys again will likely eventually be outspent by a customer who makes smaller but more frequent purchases, and that repeat customer is more likely to be engaged with, and loyal to, your company.
LTV is a vital metric not only because it allows a company to assess how profitable its average customer will be, but because it can help identify ways to increase that profitability.
If a company’s LTV is too high, they may not be spending enough money on activities to attract new business. If it’s too low, they may try to incentivize more frequent transactions with tactics like affiliate or loyalty programs.
It’s believed that your company should earn three times as much revenue from a customer as they cost to acquire, but there is a lot of debate over this ratio, as some believe it to be too low. This specific ratio is also typically presented in conjunction with SaaS products, which on average have CACs of several hundred dollars.
Improving Your LTV
As opposed to CAC, a low LTV does not necessarily mean that your company is losing money, but rather is not effectively monetizing customers as well as it could.
You may be able to increase the value of your customers by:
1. Creating a better customer experience.
Even though the majority of purchases today are done online, Apple continues to open retail stores. Every Umpqua Bank location features a silver phone that serves as a direct line to the company’s CEO. Look for gaps in your company’s customer service processes and address them in unique ways.
2. Surprising them.
Whether with a personalized email or a free product, demonstrate that your company values the relationship it has with every individual customer. To celebrate the holidays, MailChimp sent members of their partner program a throw blanket and a scented candle – neither of which have anything to do with marketing.
3. Involving them in your company.
Soliciting user-generated content is not only a great way to build brand advocacy, but you can increase engagement by making your request into a contest or promotional offer. Customers may already be likely to share pictures of purchases on their social channels, and having a reason for them to do so creates extra value for both parties.
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