Lifetime Value (LTV) models

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What is Customer Lifetime Value?

Customer lifetime value is used to measure the profit that your business generates from any given customer. It is a useful metric to help you understand your customer across a range of areas:

  • Marketing: what should be my budget when trying to acquire a customer?

  • Product: how can my business offer tailored products for my best customers?

  • Customer support: how much should the service and retention budget be?

  • Sales: what kind of customers should my sales team be spending the most time trying to acquire?

How do you calculate Customer Lifetime Value?

Based on the questions that you seek to answer, there are many things that you need to consider when calculating CLV. The most basic way of calculating CLV is to take the revenue generated from a customer and take away the money that was spent to acquire and service them.

Estimate Your Customer Lifetime Value

To perform an in-depth customer lifetime value analysis can take a lot of time. Here is a short example of a basic CLV estimate:

In your business, the average value of an order is $50. Anytime someone places an order, they have a 10% chance of returning to your business to make a repeat purchase, regardless of whether it be their first, second, or third order. We’ll assume that each time you acquire a new customer, it costs you $15.

From each customer, you should expect to receive is your average order value divided by 1, take away the repeat purchase rate/$50. (1-0.1) =$55.56). Take away from this the cost of acquisition, and you come out with your customer lifetime value of $40.56.

How to Predict Your Customer Lifetime Value

You can calculate CLV over specific time periods, historically, or predicatively. Each calculation serves a different purpose. Calculating predictive CLV is the best way to work out what each customer is worth to you currently, as well as seeing how their value will change as time goes on.

Increasing LTV

It’s important that businesses place a focus on improving their LTV. When you successfully get customers to return to your business over and over again, you successfully create a revenue source that doesn’t cost very much to maintain, and therefore is great potential for profit.

One of the things you could do to increase your LTV is use the data you have in a more efficient way. Each time people interact with your business, whether this be through website or app, you collect a certain amount of data about them. This data can be used to expand your knowledge on these visitors, and hence create a better customer experience for them. Creating a better customer experience increases your chances of winning their business long-term. Not using the data you have is throwing away opportunities for long-term business creation.

Customer service is another method of significantly boosting your LTV. Improving your customer service is one of the best ways to entice your customers to return. To begin on improving this, you could try increasing your number of touchpoints wherein you could deliver exceptional customer service. Whatever you’re doing in your business to improve customer service, you’re also increasing LTV by doing so.

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