The Importance of Customer Lifetime Value for Your Business
Accurately predicting customer behavior is crucial in making informed decisions for your business. Customer Lifetime Value (LTV) is a metric that forecasts how much revenue a customer will bring in over their relationship with your business, allowing you to prioritize high-value customers and optimize marketing spend.
In this guide, we delve into the significance of Customer Lifetime Value, providing insights on how to calculate it and how to leverage it to drive business growth. With a solid understanding of LTV, you can make data-driven decisions and create strategies that will maximize your business’s potential.
What is Customer Lifetime Value (LTV)?
Customer Lifetime Value, often abbreviated as LTV or CLV, is a crucial business metric used for predicting the total value of a customer, customer cohort, or customer segment throughout their relationship with your business. It helps you understand how much revenue a customer is likely to generate for your business, which aids in determining the investment you need to make in customer acquisition.
How We Calculate Customer Lifetime Value
We use a straightforward formula to calculate LTV for a specific customer or group of customers, which is:
- LTV = Existing Customer Value + Predicted Future Customer Value
- Existing Customer Value refers to the total amount a customer has already spent with your business.
- Predicted Future Customer Value represents the total amount that the customer is predicted to spend with your business in the future.
Starting with Customer Lifetime Value
The primary objective of calculating LTV is to determine the complete value of a customer cohort. This is a significant factor as it enables you to compute the Return on Investment (ROI) of the marketing campaigns utilized to acquire the customers in question.
After obtaining the ROI, you can compare it with other marketing campaigns to determine which one is more effective or monitor it over time to keep track of changes.
Here’s how you can begin tracking LTV with the help of By the Numbers:
1. To access the LTV report, navigate to the left-side menu and select LTV.
The report should then be displayed on your screen:
This report provides you with several crucial pieces of information, including:
- Monthly Cohort: A group of customers who made their first purchase in a particular month.
- LTV: (Current Value) + (Future Estimated Value)
- Actual Value: Total sales for this cohort to date.
- Predicted Value: Estimated future sales for this cohort.
- Customer Return Rate: The percentage of customers that returned within a specific timeframe.
- Average Lifespan: The expected average lifespan of a cohort in months.
- Average Order Value (AOV): The total sales divided by the number of orders.
- Order Frequency: The average number of orders placed by the cohort in a given month.
2. To view the Segments, go to the left-side menu and select Segments.
The menu for segments should now be visible on your screen:
In addition to the typical details of a Segment such as AOV and Order Frequency, we now provide the Average LTV. This metric indicates the amount of money that the average customer in that Segment is anticipated to spend with your store during their customer lifetime. Conversely, Customer Value shows you how much money the average customer in that Segment has spent with your store.
3. Click on the “View Customers” link under any segment to get a report that shows the customer’s data for that segment.
You should see something similar to this:
In addition to their total sales, customer details now include each individual customer’s LTV. The LTV represents the expected amount a customer will spend while total sales show how much they have already spent with your business.
4. Generate a custom Segment utilizing LTV
While generating a custom Segment, you can select LTV from the Filters dropdown. You should see something like this:
With this feature, you can now filter for customers who have a Total Lifetime Value (LTV) that is above or below a specific amount that you decide on.
5. click on “Loyalty” from the navigation menu on the left-hand side
A screen similar to this should appear:
Each loyalty square displays the LTV for the corresponding group of customers. This LTV value represents the average amount that the current group of customers is predicted to spend with your business.
What Can You Do With This Information?
The information provided by LTV for customer segments or cohorts can help predict the total value a customer can bring to the business. Higher LTV means customers bring more revenue on average for the duration of their customer lifetime. This information can be used in several ways:
- Adjusting marketing budget: LTV can help you decide whether you’re spending too much or too little on marketing to a specific customer group.
- Pricing products or services: LTV can help you set prices that are profitable and sustainable for your business.
- Informing product development: LTV can help you decide which products or features to develop next.
- Optimizing retention marketing: LTV can help you decide how much to spend on customer retention activities by identifying the most loyal segments.
By the Numbers provides Customer Lifetime Value tracking along with 20+ other metrics to make data-driven decisions. Try it for free for 14 days, with no credit card required, and scale your business with insightful analytics!