Any person already working in the world of digital marketing probably can already identify most of the various terms that flow across daily conversations. Lifetime Value, or just LTV, is one of the most important ones.
This postulates the value of the customer life cycle within your company; in other words, all revenue generated over the period of the relationship with the company.
The thing is, not all companies know the real importance of this indicator. Its function is to measure the scenario of the last few months and guide your business towards future decisions.
What is Lifetime Value?
Literally translated, Lifetime Value means “value over a lifetime.” It is a calculation that the company makes to understand how much net value is generated by a customer.
This means, basically, through this indicator, your company can measure the amount of money that is being invested in by a customer while the relationship or contract is active.
The interesting thing is that Lifetime Value helps with customer retention. It’s a way for your company to stay on top of how your sales strategies are performing.
Furthermore, this calculation can guide you when deciding on future investments.
How important is LTV for your business?
The use of LTV is very important, but much more than that, this metric can be even more efficient if used in conjunction with others. The great advantage is in predicting future investments.
An example of this is calculating CAC , or customer acquisition cost. For comparison purposes: the higher the LTV, the lower the CAC should be.
It is through Lifetime Value that it is possible to predict how much your customer spends and at what point in this life cycle profits begin to be made.
Imagine, for example, a streaming subscription service. Most platforms offer a free trial period, and then there are the costs of advertising and content production.
In other words, for the first few months, it is very likely that there will be no profit from that customer. However, if we predict that the customer will remain a subscriber for a year, the profit will be greater than the investment made .
It is through Lifetime Value that we discover the value of future investments and what the resulting profit will be.
How to easily calculate Lifetime Value?
Before applying the calculation, you will need some information such as:
- Average ticket ;
- Average purchase time;
- Average time of relationship with the customer;
To make it easier, let’s give an example of how this calculation works with real values. Imagine that your company offers magazine subscriptions. Each monthly subscription costs 100, which is your average ticket.
Since we are talking about a subscription, the average is that annual plans are consumed more, so 12 months would be the average purchase time for your customer. Also, suppose that this customer stays with your company for 3 years.
Therefore, we will have:
LTV = (100 x 12) x 3
LTV= 1200 x 3
LTV= 3600
In this case, your company’s LTV would be R$3,600. In other words, this is the amount that each customer spends with your brand during their lifetime.
What indicators does Lifetime Value depend on?
For LTV to be effective, it needs to be analyzed within a context . As mentioned earlier, Lifetime Value achieves better results when worked with other indicators.
Comparing it to other metrics helps predict different scenarios and shows the current situation the company is in. This makes it easier to know what needs to be improved.
They are:
Churn Rate
This is the measure of lost customers in your portfolio. Churn rate must be analyzed since it directly contradicts Lifetime Value.
This is because a higher lost customer rate will result in a lesser LTV.
Of course, this works both ways round as well. The higher your Lifetime Value, then the lower your churn rate, so the more you should focus on retention and satisfaction of your customers.
Customer Acquisition Cost (CAC)
This is an indicator that should be compared with LTV frequently. When calculating Customer Acquisition Cost, we see how much the company spends to close a sale.
The CAC value should never be higher than the LTV. Nor should it even come close to that value. This is because, if your acquisition cost is close to or higher than the profit of having that customer in your portfolio, the profit will exist.
Average Ticket
Of course, you’ve already grasped by now how important this metric is. The Average Ticket forms part of the LTV formula.
So, that simply means, of course, nothing more than the average amount that each customer spends with your company.
Remember to offer an excellent quality product or service, as this is the only way your customer will be willing to stay with your company for longer and invest more over time.
Tips to increase your company’s LTV
As we saw before, for investments to be worthwhile, it is necessary to motivate the customer to stay with you for as long as possible. To this end, there are good practices capable of encouraging such behavior.
Invest in Content Marketing
We always emphasize here on the blog the importance of investing in content marketing. This is a valuable resource that works regardless of the size of your business. And best of all, it can be applied across different platforms .
Whether through blogs, videos, email marketing or rich materials, content marketing is the creation of quality content. This type of production generates authority for your company and attracts more and more customers.
Keep your customers loyal
Invest in after-sales service. After a sale is closed, the work continues to build customer loyalty. Train your customer service team so they can continue nurturing your customer base.
Neglecting this topic can cause the churn rate to increase and the Lifetime Value to no longer be sufficient.
Invest in Customer Success (CS)
To ensure that the customer is served in the best possible way, your company can count on a CS team. This team will ensure that all contracted products or services are delivered with excellence.
They are also the ones who must serve the customer with due attention. Listening to customers and anticipating problems, as well as solving them, is an essential part of this team’s work.
Focus on your most valuable customers
Over time, you will be able to identify who your company’s most profitable customer is. That is, the one who spends the most on your brand. Invest in them.
Find ways to show that you value them. Take action for this customer, target exclusive marketing campaigns at them, propose loyalty programs.
This way, you increase the probability of success and maintain a good relationship built on trust and mutual dedication .
Stay tuned for new technologies
Pay attention to recurring market changes. New technologies are implemented frequently and your company must know how to adapt to each of them.
Understanding Lifetime Value as not only a current investment, but also for the future, it becomes essential to follow trends.