Customer Lifetime Value (LTV) is an effective way of benchmarking your Customer Acquisition Cost against the Actual Profits you’ll generate from a single Customer.
What is LTV?
Customer Lifetime Value is calculated by subtracting the total costs of acquiring a customer from the profits they generate. LTV can only be used to create basic financial estimates for the future, but can nonetheless prove instrumental in helping you make better decisions for your business.
LTV is useful because it provides a guideline as to how much you can spend to acquire customers, in accordance with their average spend. You can also evaluate the payback period – the time it takes for the customer to repay their acquisition costs. Longer payback periods amount to more risk for the business.
What’s more, investors always pay close attention to an organization’s LTV when carrying out wider financial health assessments. By getting to know your LTV, you’ll be in a much stronger position to drive your business forward.
Customer Lifetime Value (LTV) represents the average revenue that a customer generates for your business before they churn, offset by gross margin. LTV in SaaS is only ever used as a forward-looking estimate of the future, but calculating a reasonable estimate allows you to make smarter decisions for your business.
Your Complete Guide to LTV
Business owners and marketing teams are constantly on the lookout for reliable ways to acquire new customers and enhance customer loyalty in a cost-effective manner. Calculating the lifetime value of your customer is an essential step in the journey towards boosting your company’s ROI in product development, customer support and marketing arenas alike.
Why Calculate Your Customer Lifetime Value (LTV)?
In the simplest terms, LTV is a simple yet effective method for forecasting projected profits from customers throughout their lifetime relationship with your brand. Roughly translated, it’s a case of calculating how much you can expect to receive in accordance with the costs of acquiring them in the first place.
By calculating your customer lifetime value, you’ll have the opportunity to make more strategic decisions in key areas such as:
Product and Service Development – Customer lifetime values can help guide decisions regarding product and service development, such as whether it would be cost-effective to alter the design of a product to cater to the preferences of a sub-segment of your target audience.
- Marketing – Your LTV can also be factored into the decisions you make regarding customer acquisition, specifically with regard to the efficiency and cost effectiveness of your marketing strategy.
- Customer Support – Customer loyalty is driven by quality customer support, which represents an important investment for driving an improved customer lifetime value for your business.
How is Customer Lifetime Value Calculated?
There’s a great deal of data that can be brought together to create an accurate customer lifetime value. At its core, however, a basic customer lifetime value can be calculated as follows:
LTV = Lifetime Customer Revenue – Lifetime Customer Costs
Working with this formula, a typical example could play out like this. A customer orders products and services to the total value of USD 2,000 ($1,000 product price you charge in Year 0, and $1,000 revenue from the services you provide during Years 1 & 2) during the lifetime of their relationship with your business (for example, for 3 years). During these 3 years, the total cost of the sales and services you’ve provided add up to USD 750. This would result in an LTV of USD 1,250 ($2,000 – $750 = $1,250). With this data, it can be concluded that to spend anything more or equal than USD 1,250 on customer acquisition would be counterproductive. Doing so would mean breaking even at best, or coming out with a loss. Acquisition costs regularly fluctuate and vary significantly from one organization to the next.
In all instances, however, customer retention is considered a more effective and affordable strategy, with the potential to deliver a much healthier ROI.
How to Increase Your LTV
Recent years have brought about the emergence of hundreds of thousands of new start-ups, intensifying competition across all industries and sectors. As a result, businesses are placing heavier emphasis than ever before on the acquisition of new customers. This, despite the fact that customer acquisition typically costs 700% more than customer retention.
Striking the right balance with your customer lifetime value calculator holds the key to your brand’s long-term success. The good news is that there are countless avenues to explore for enhancing and improving your LTV.
The most effective of all being as follows:
1. Upsell, Cross-Sell and Do Something Your Competitors Don’t
Be it products, services, features, resources or anything else, it’s up to you to provide your customers with something they have an interest in. It could also be something as simple as a blog, providing the kinds of insights that keep your customers coming back for more. It could be the quality of the service you provide, the simplicity of your online store, the consistent speed of your deliveries – whatever you can think of to set you apart from your competitors and nurture the relationships to deliver more value to the existing customer.
2. Feature Your Fans and Followers
Placing your customers in the spotlight can be a great way of both nurturing retention and attracting the attention of new customers. From photos to video testimonials to reviews and recommendations, it’s all about engaging with the audience you intended to win over. Become part of the community, rather than building barriers between you and your audience.
3. Send Something Unexpected
Rewards and incentives are all well and good, though are often all-too predictable. But when we receive something unexpected completely out of the blue from a brand we’ve done business with, we can’t help but shout about it. All of which can work wonders for the respective firm’s reputation and position. Even if it’s something as simple as a hand-written greetings card, it could have the desired impact.
4. Request Advice and Suggestions
Rather than expecting customer feedback to flow your way organically, consider adopting a proactive approach. Make it as easy as possible for your customers to make suggestions and include some kind of incentive for doing so. Thank them for their comments, respond to any comments published online and act on their suggestions. It’s only when customers genuinely believe you’re listening to them that you can expect to win their loyalty.
5. Provide Stellar Customer Support
Anyone wishing to do so should be able to contact your company instantaneously via whichever channel appeals to them most. It’s up to you to be there when your customers need you – not the other way around. Under no circumstances should you ever make your customers jump through hoops simply to contact a member of your support team. As mentioned a little earlier, stellar customer support typically holds the key to customer loyalty and a more robust LTV.
Your Customer Lifetime Value is by no means a silver-bullet metric capable of solving every issue you may face. Nevertheless, it’s one of the most invaluable and useful metrics to be brought into your key decision-making processes.
Once you’ve established your current LTV, it’s up to you to do whatever it takes to enhance and improve it where possible.
Author: Dennis Dubner, CEO of SONDORA MARKETING.