LTV stands for Lifetime Value.
Lifetime value (LTV) is a metric that defines the worth of the average customer to your business, during the time period you retain that customer.
LTV is an aggregate metric, unlike CLV (customer lifetime value) that is the lifetime value calculated per individual customer.
An important thing to remember is the lifetime value (LTV) does not measure profit, it only measures revenue. The metric is a prognostication and an assessment of the average revenue that clients would generate in their consumer lifespan.
The metric plays a role in a company’s economical and financial decisions, such as forecasting and budgeting. Lifetime value (LTV) helps businesses decide on and settle for certain acquisition investments and customer retention strategies.
LTV is an adequate way to determine if a return on investment (ROI) is sufficient and if a marketing strategy is effective or not. Marketers need to watch out if the costs to acquire a new customer start exceeding the LTV and rethink their approach.
It is smart to take the LTV value into consideration when making decisions in product development. The metric helps analyze customer segments and prospects so that product changes remain cost-effective and stay profitable in the long term.
If you have the opportunity to explore individual CLV (customer lifetime value) metrics, you can utilize LTV for cohort analysis, marketing segmentation, retention campaigns, loyalty programs, and run individual promotions for high-LTV customers.
The most basic way to determine your business or product line's LTV is to use the simple calculation:
LTV = Lifetime Customer Revenue - Lifetime Customer Costs
For instance, if the average person spends $500 on your products or services during the entire period of being your client, and the costs to reach and keep that customer are $250, then the LTV is $250.
This is not the only way to define LTV. If you throw more metrics and factors into the mix, you will get an even better overview and a more structured perception of lifetime value on an individual level (CLV).
CLV (customer lifetime value) is a metric that takes into consideration factors such as how long a customer does business with your company and how much revenue they generate:
CLV = Revenue per purchase x Purchase frequency x Customer lifetime
For example, if the revenue averages at $10 per purchase and the client makes a purchase once every 3 months, over the course of 10 years, then the CLV is:
$10 per purchase x 4 purchases per year x 10 years = $10 x 4 x 10 = $400
If you want to further refine the LTV-related numbers, you can also include Retention Rate and Discount Rate in your CLV calculation.
The importance of LTV comes from the fact that it helps businesses estimate how much revenue customers might bring. That makes LTV crucial for price setting, customer retention strategies, product updates, manufacturing changes, as well as sales and profit forecasting.
With such extensive information, marketers can evaluate and revise campaigns and targeting, as well as determine which products and services justify advertisement spendings. Most importantly, LTV could be a guiding light to the perfect marketing strategy.
A “good” lifetime value has no standard definition. The ideal case scenario for businesses is to attract and target high-value customers that convert and/or regularly make purchases. High-value customers are the consumers with a high LTV.
These types of loyal customers will bring the most revenue, so they should always be rewarded and retained. For example, by creating referral programs, loyalty programs, providing special discounts, and/or VIP customer service.
Unless LTV is equal to or significantly less than the cost to acquire a customer (CAC), your business is not doing excessively bad. But in order to make a sufficient profit, always aim for a higher LTV:CAC ratio, in favor of lifetime value. Otherwise, you are probably investing money and barely getting any returns.
A revenue forecasting report would not be completed without including the LTV variable.