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What is LTV?
LTV, or lifetime value, is a key metric that reflects the total financial value a customer brings to a company over the entire duration of their interaction. This measure encompasses the entire period—from the first purchase to the last. LTV translates the abstract value of a customer into concrete numbers, allowing for a better understanding of how much money each customer can generate. Knowing this figure significantly simplifies the assessment of a customer's importance to the business—instead of stating that "the customer is important to us," you can operate with specific figures, such as an average of 100,000 rubles per customer.
Why calculate LTV?
Determining the lifetime value of a customer (LTV) is a crucial aspect for any business, as this information helps to define the right direction for development. This is especially relevant for industries such as SaaS, where the business model implies long-term interaction with customers. LTV not only shows the value of a customer in monetary terms but also provides numerous other benefits:
- Determining the budget for customer acquisition and retention: With LTV, one can understand how much can be allocated for marketing. For example, if LTV is 100 rubles and acquisition costs are 10 rubles, then you can afford to increase spending by 2-3 times.
- Assessing the payback period of costs: If you spent 10 rubles to acquire a customer with an LTV of 100 rubles, and that customer stays with you for 5 years, your costs will be recouped in the first year.
- Analyzing customer value: Identifying high-value and low-value customers allows you to focus on more attractive segments.
- Optimizing advertising channels: Understanding which channels bring in more valuable customers helps to effectively allocate the budget.
- Improving engagement with existing customers: LTV motivates businesses to focus more on customer retention, showing how much each customer can still bring.
How to calculate LTV?
There are several approaches to calculating LTV, and their accuracy varies depending on the number of factors considered. To achieve more accurate results, more variables must be taken into account. The main methods of calculating LTV are:
Simple method
The simplest way is to divide total revenue (or gross profit) by the number of customers:
LTV = Total Revenue / Number of Customers.
However, this method has its limitations, as it does not take into account the time period and may include new customers whose impact on revenue is still minimal.
Optimal method
A more complex formula that allows for more factors to be considered is as follows:
LTV = AOV x T x AGM x ALT,
where:
AOV — average order value;
T — average number of orders;
AGM — average margin;
ALT — average customer lifespan.
If you do not have data on the average customer lifespan, it can be calculated using the churn rate:
ALT = 1 / churn rate,
where the churn rate is calculated using the formula:
Churn Rate = (CB-CE) / CB x 100%,
where CB — number of customers at the beginning of the period, CE — number of customers at the end of the period.
Tools for increasing LTV
To increase LTV, it is sufficient to enhance at least one of the multipliers in the formula: average order value, purchase frequency, or customer lifespan. Here are some tools that can help with this:
- Email newsletters: An effective way to maintain communication with customers and increase their LTV.
- Web push notifications: A convenient way to send messages to customers directly in their browsers, helping to increase purchase frequency.
- Loyalty programs: Reward systems for customers that encourage repeat purchases.
- Retargeting: Reminding users of the brand who previously visited the site, which promotes repeat purchases.
To increase LTV, two main approaches can be utilized: reducing costs and increasing revenues. By analyzing the P&L structure, growth points can be identified. Be creative and seek unconventional solutions to enhance customer lifetime value.