What does LTV mean?
Customer LTV (life time value) is about looking at what the profit is on your company's individual customer - over the whole customer "lifetime".
Your customer's lifetime is measured by the total profit from the first time your customer places an order in your store to the last time your customer buys from you.
Example of a customer's lifetime earnings:
- A customer purchases services from your company at a cost of 50,000 kroner each year. After 4 years, it is no longer relevant for the customer to buy your services. In those 4 years, you have made a total profit of DKK 200,000 on this single customer, which corresponds to an LTV of DKK 200,000 on this customer.
What can you use LTV for?
LTV is a great calculation to know, especially if you are a business owner or work in a marketing department. By calculating LTV, you can get a really good idea of how much money would be optimal to spend on marketing activities.
As a rule of thumb, a lead for example, not cost more than the life time value the customer can provide to your business. That is:
- If you are good at retaining your customers, the cost of acquiring a customer may well be more expensive than the initial amount the customer puts into your business on the first purchase, as there are likely to be more payments to come.
- If your customers typically only buy from you once, the cost of acquiring a customer should not exceed the initial amount the customer puts into your business.
How do I calculate LVT (life time value)?
Most companies calculate LVT as the average of a group of customers who buy the same product or service from your company.
Before you can make the LVT calculation for a group of customers, you need to have the following information ready:
- What does it cost you to get a new customer
- How much money do you make a year from one customer
- What percentage of your customers do you lose per year.
Once you have the above values in place, you can set up the calculation as follows:
- Your customers' average lifetime multiplied by your profit per year minus the cost to you of getting a new customer = LTV (life time value)