Lifetime Value (LTV)
Lifetime Value (LTV), also known as Customer Lifetime Value (CLV), is a measure of the total expected revenue that a business will receive from one customer over the course of their customer lifecycle.
Why is Lifetime Value (LTV) important?
Lifetime Value is important because it allows businesses to be more strategic in the way they think about their customers and their marketing spend. With a deeper understanding of the total revenue a customer will provide over their customer lifecycle, a business is able to make more informed decisions about the effectiveness of their marketing activities.
For example, say a business is spending £25 on average to acquire a new customer (Cost Per Acquisition, or CPA). The same business has an Average Order Value (AOV) or £20. If we rely just on this kind of one-off, short-term thinking, it looks like the cost of acquisition is too high, and the business will make a loss.
However, if over the cost of their customer lifecycle, we know that the customer’s Lifetime Value is in fact £50, we know that this form of customer acquisition is indeed profitable for the business. In fact, the business can probably afford to bid with an even higher, more aggressive CPA, since this will allow them to grow faster while still turning a profit.
How to calculate Lifetime Value (LTV)?
Calculating your average customer’s Lifetime Value is pretty straightforward. You need to multiply together two other popular eCommerce KPIs: Average Order Value (AOV) and Purchase Frequency (PF).
The equation is as follows:
Generally speaking, you’ll look at the Lifetime Value of a customer of the entirety of their customer lifecycle. However, you can also narrow this down to look to analyse a customer’s value over a given time period. For example, some businesses like to track the average number of times a customer orders per year, and so will look at the value they expect to derive from a customer over the course of a year.
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If you’d like help measuring your Lifetime Value, or any of the other eCommerce KPIs mentioned here, Optiminder can help. Similarly, we can assist businesses in ascertaining the effectiveness of their current marketing activities, and trialling out new initiatives to try and improve your repeat rate (and therefore your lifetime value). Reach out today to find out how Optiminder can help you build a sustainable and profitable business.