As a business owner, there are dozens of important metrics you need to both track and understand.
From your net profit margin to sales revenue and retention, these critical metrics help you stay on track as you grow and scale your business. Not tracking the right metrics is a dangerous road to walk, as it can lead you to some unsuspected surprises throughout your business journey.
As a business owner, there are dozens of important metrics you need to both track and understand. From your net profit margin to sales revenue and retention, these critical metrics help you stay on track as you grow and scale your business. Not tracking the right metrics is a dangerous road to walk, as it can lead you to some unsuspected surprises throughout your business journey.
How is LTV calculated?
LTV is calculated by finding out the average churn and average spend of a user over the course of a specific period to predict their overall spend in an app. Tapdaq, a mobile advertising network, created a simple equation for calculating LTV: LTV = ARPU x 1/Churn
The formula calculates a user’s lifetime value by predicting how much money they’ll make in a set period (the ARPU, or Average Revenue Per User) and by how well they return (1/churn). With this formula, you can attempt to predict how much a user will be worth throughout their time spent on an application.
What is customer lifetime value?
Customer lifetime value (CLV or CLTV) is a metric that represents the total net profit a company can expect to generate from a customer throughout their entire relationship. It takes into account the customer’s initial purchase, repeat purchases, and the average duration of their relationship with the company.
Customer lifetime value helps you understand and gauge current customer loyalty. If customers continue to purchase from you time and time again, that’s usually a good sign you’re doing the right things in your business. Furthermore, the larger a customer lifetime value, the less you need to spend on your customer acquisition costs.
Why is customer lifetime value important?
Understanding CLV allows you to make informed decisions based on how long a customer typically buys from you and what they spend over the lifetime of that relationship. This metric can help inform your strategy on acquisition, customer retention, customer support, and even the quality of your products and services.
Calculating customer lifetime value for different customer segments helps in a number of ways, mainly regarding business decision making. Knowing your CLV can tell you, among other things:
- How much you can spend to acquire new customers (CAC) and still have a profitable relationship
- The exact amount you can expect an average customer to spend over time
- What kinds of products high-value customers want
- Which products have the highest profitability
- Which customer relationships are driving the bulk of your sales
- Who your most profitable types of clients are
- Details about the customer journey and churn rates
Using your CLV as a base, you can work to better understand your most loyal customers. What do they like? Why do they continue to purchase from you?
Together, these types of decisions can significantly boost your business’s profitability.
As with any metric you track in business, knowing the number is not enough. You have to use your CLV to shape your overall business strategy.
- If your customer lifetime value is on the rise, that could mean you should continue to invest in product development or your customer success teams.
- If your CLV is declining, that might tell you your latest marketing strategy could use a reboot.
Ways to improve CLV
- Make it easy for customers to return items they’ve purchased from you. Making it hard or expensive will lower customer satisfaction and reduce the odds of them making another purchase.
- Make strategic exceptions for your most loyal customers. For example, if someone is planning on canceling a subscription service you offer, give them an option of remaining a user with a small discount.
- Interview and connect with your best customers to understand why they continue to choose your brand.
- Set expectations regarding delivery dates, aiming to underpromise and overdeliver. It’s much better to promise delivery by August 1 and have it in their hands by July 20 than the reverse.
- Create a loyalty program. Encourage repeat purchases with rewards that are both attainable and desirable.
- Reward loyal customers. Offer freebies for doing business with you to build brand loyalty.
- Run deals exclusive to existing customers.
- Use upsells to increase the average value of a customer transaction, which is the equivalent of McDonald’s asking, “Would you like fries with that?”
- Stay in touch. Long-time customers want to know you haven’t forgotten them. Make it easy for them to reach out to you as well.
Using CLV to shape your business strategy you’ll ultimately build a more profitable, successful business by focusing on attracting and retaining long-term customers who will become advocates for you, as well as repeat buyers
FAQs
What is Customer Lifetime Value (CLV) or Lifetime Value (LTV)?
Customer Lifetime Value (CLV) or Lifetime Value (LTV) is a metric used in marketing and business to estimate the total revenue a customer is expected to generate over the entire duration of their relationship with a business. It helps businesses understand the long-term value of acquiring and retaining customers.
What factors influence CLV?
- Customer Acquisition Cost (CAC): The cost associated with acquiring new customers.
- Retention Rate: The percentage of customers who continue to do business with the company over time.
- Average Order Value (AOV): The average amount a customer spends per transaction.
- Frequency of Purchase: How often a customer makes purchases from the company.
- Customer Satisfaction and Loyalty: The likelihood of customers making repeat purchases and referring others.
Why is CLV important for businesses?
CLV is important because it provides insights into the profitability of acquiring and retaining customers. By understanding the value each customer brings over their lifetime, businesses can make informed decisions about marketing strategies, customer acquisition costs, pricing, and resource allocation.
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