LTV: Definition and why calculate its customer lifetime value?

What is LTV (Lifetime Value)?

Lifetime Value (LTV): Definition

Lifetime value, called customer lifetime value in English, is also regularly presented as "CLTV" or "CLV" for customer lifetime value. Customer lifetime value is a crucial metric for any company launching a marketing strategy.

Thanks to LTV, businesses can precisely understand the net gains generated by their customers throughout the entire commercial relationship. In other words, LTV is the revenue a company can expect from a customer during their entire relationship.

For a business, knowing customer lifetime value is essential for better anticipating various upcoming costs. It can then more easily deploy strategies to nurture loyal customers.

LTV is expressed in dollars because it represents the estimated amount a customer brings in during their relationship with the company, or conversely, how much it costs to lose them.

Generally, when we discuss LTV, other indicators are never far away, particularly the break-even point. This is the day when the company reaches profitability threshold—the moment when the business becomes profitable. Sales made allow exceeding what was spent on marketing campaigns. Customer acquisition cost and retention rate are also complementary indicators.

Lifetime Value (LTV): What This KPI Does

LTV or CLTV is a KPI (key performance indicator) for businesses. As we've seen: calculating LTV means questioning how much customers will bring in throughout their customer journey.

The objectives of this calculation are numerous:

• LTV helps you understand what a customer brings in relative to the costs needed to acquire them

• Identify the most profitable customer segments

• Anticipate future spending on prospecting, product/service improvement, or advertising

• Answer very important business questions such as: how much should we spend to acquire a new customer? Or how much time should the sales team spend converting leads into customers?

Marketing and sales teams, in particular, are very concerned with calculating customer lifetime value. This gives them a compass for developing adapted and more effective marketing strategies.

But all teams in a company will be impacted by this metric: product, customer service, sales...

‍Lifetime Value CLV: How to Use This KPI

Having Necessary and Organized Data to Analyze LTV

To succeed in calculating and tracking customer lifetime value, you must first collect the right quantified data. Otherwise, you risk getting an incorrect result.

The first thing to do is identify a customer group that will be the reference customer group over a given period. Your role is then to study the products or services ordered by these customers. The idea is to determine typical behavior and study similarities and differences within this reference group.

The study of these behaviors must be done using a Unified Customer Repository like CRM (customer relationship management) or DMP (data management platform). These platforms allow aggregating all available customer data, particularly a customer's weight in the company's revenue.

Note however that LTV remains a long-term revenue projection. We therefore see two pitfalls to avoid to continue having a reliable indicator over the months:

• LTV relies on concrete elements that exist today (collected customer data), but must be adjusted in real-time with known future variables. However, you shouldn't be unreasonably attached to real-time data. You must optimize data acquisition to calculate LTV and draw consequences within reasonable timeframes (every six months or year)

• LTV also relies on projecting the customer's maximum lifetime. It's good to stick to a 2 or 3-year maximum projection

Regularly Observe Lifetime Value Evolution

As we've seen previously, LTV is valuable for guiding marketing or sales strategy. Indeed, its calculation allows anticipating costs to maintain relationships with customers.

To do this, it's valuable to analyze your reference customer group's data regularly. But regularly doesn't mean daily!

Many companies integrate LTV calculation into their business performance dashboards. However, a marketing team won't change its trajectory overnight if it observes revenue variation over a few days in its reference customer group.

We therefore recommend analyzing lifetime value precisely several times per year: quarterly, once every 6 months, or annually. This observation and decision-making frequency should be adapted based on business type and number of contracts completed.

Finally, think about measuring customer lifetime value across different customer segments: customers who came through the website, customers who came through social media, etc. This allows even better understanding of different marketing actions' impact on each segment.

Gauge Your Customer Experience via Customer Lifetime Value

Do you really know what your customers think of you? Sure, they used your services or products at a given moment. But will they be inclined to return to you?

Calculating customer lifetime value helps reflect on these questions. On one hand, by analyzing the various data needed for lifetime value calculation. We'll focus on:

• Customer lifetime

• Retention rate

• Customer loss rate

• Average order value

• Customer marketing cost

It's important to consider whether the customer loss rate was higher during a given period. This can provide improvement insights for customer experience.

On the other hand, by planning commercial actions or marketing developments tailored for existing customers or a specific segment. Marketing and offers can be personalized based on collected customer data.

Building Quality Relationships with Your Customers to Increase Your LTV

The more positive the relationship with a customer, the more they'll want to continue in this direction. They won't be interested in seeking your offer from a competitor. They might even recommend you to their peers!

Thus, the more satisfied a customer is and wants to remain so, the more customer value increases. To do this, you must first provide them with active listening. It's important to understand what they need to be satisfied.

However, it's difficult to really know what a customer likes or dislikes. It's therefore recommended to organize regular customer survey campaigns. Either by soliciting a panel of "ambassador" customers by phone, or by implementing a customer review system upon purchase on your website.

Each of these customer reviews should be carefully analyzed to extract as much information as possible. It's possible that a negative point returns in several reviews: draw appropriate conclusions and ensure you provide an explicit response.

Some suggestions:

• Create custom offers

• Offer a loyalty, subscription, or rewards program

• Provide individualized advice (dedicated customer advisor)

Adjust Your Marketing Actions Thanks to Your LTV

Customer data collected for LTV calculation is crucial. With it, you can understand the most appreciated products or services and customer satisfaction levels with your support.

This information will help improve personalization of your content. You can implement a more precise content marketing strategy, offering better results for retaining existing customers and attracting new ones.

Additionally, LTV calculation helps choose among all possible acquisition strategies. Clearly, a company can't communicate everywhere, all the time. It must therefore prioritize its marketing actions. By measuring LTV based on an acquisition channel, you can know more precisely:

• Which channels are most profitable?

• Which channel to prioritize for converting prospects into long-staying customers?

• Conversely, which channel offers poor results?

Marketing actions should then be adapted in light of this information. If your newsletter brings few new sales, perhaps your marketing team shouldn't deploy so much energy on this point.

Conversely, if you find that search engine advertising is a good acquisition channel, seek to increase and improve your actions.

How to Calculate Lifetime Value (LTV)?

Data to Collect for Calculating Lifetime Value

As we've seen previously, LTV represents the total revenue a customer will bring to a company over the years.

This is the real challenge: retaining a customer costs less than acquiring a new customer. Analyzing and improving your LTV is a good way to increase your revenue.

There are different ways to calculate LTV. We've followed this one for its simplicity. Before performing this calculation, you'll need to go through intermediate steps with calculating and/or collecting data:

Customer Lifetime

This data helps evaluate customer lifetime—how many months or years the customer remains loyal.

To do this, you must calculate the retention rate. This is calculated by dividing the number of remaining customers over the study period by the total number of customers over the same period:

Retention Rate = Number of remaining customers / Total number of customers

Then, to know the average buyer lifetime, you perform the following calculation:

Average Customer Lifetime = 1 / (1 - Retention Rate)

Purchase Frequency

During this lifetime, how many times did the customer purchase? It's calculated as follows:

Purchase Frequency = Number of orders / Number of customers

Average Order Value

How much is the average of purchases made by the customer estimated at?

Average order value is calculated by dividing revenue realized with this customer by the number of orders made by the customer:

Average Order Value = Customer Revenue / Number of Orders

LTV/CAC Ratio

To go further in using LTV, you can also calculate the ratio between customer lifetime value and customer acquisition cost, or LTV/CAC ratio. This will help you better manage your marketing spending and retain customers, thus deploying an efficient marketing strategy.

LTV Calculation Example

You can finally calculate lifetime value (LTV) using the following formula:

LTV = Customer Lifetime × Purchase Frequency × Average Order Value

Let's now take an example to illustrate LTV calculation: Imagine you're Company A selling products on an e-commerce site. We'll first determine:

• Customer lifetime: Reminder calculation: Retention Rate = number of remaining customers over study period / total number of customers over this period

Company A retention rate = 500 retained customers / 1000 total customers Company A retention rate = 0.5

Company A average buyer lifetime = 1 / (1- 0.5) Company A average buyer lifetime = 2

• Purchase frequency: Company A purchase frequency = 2000 / 1000 Company A purchase frequency = 2

• Average order value: Company A average order value = $1,000,000 / 2000 Company A average order value = $500

• Company A's LTV is calculated as follows: Company A LTV = 2 × 2 × $500 Company A LTV = $2,000

A customer generates an average of $2,000 in revenue during their lifecycle.

This calculation is necessary. However, to obtain more concrete data to adapt marketing spending, you can calculate LTV or CLV in profits. By taking marketing costs into account in the calculation, we're more interested in a customer's profitability.