Often considered an essential element of understanding your businesses profitability – working out costumer lifetime value (LTV) can offer a benchmark when assigning ad spends and target customer acquisition cost in digital marketing campaigns. Before measuring your customer lifetime it’s important to understand exactly what LTV is.
Put simply, customer lifetime value is a metric that indicates the total revenue you can expect from a single customer during your entire business relationship with them. It is sometimes known as Customer Lifetime Value (CLV) but as LTV is more common.
LTV lets you know how much a customer has converted and helps you calculate a long-term return on investment. It goes beyond just one campaign or sales push, helping you assess your marketing and then improve its Return on Investment (ROI).
How to calculate customer lifetime value
You can calculate customer lifetime value using this simple formula:
LTV= customer revenue over a given period ÷ churn rate of your company over a given period
“Customer revenue over a given period” means how much revenue you get from customers during a specific period, such as 15 days or one month etc.
“Churn rate of your company over a given period” is the percentage of customers who stop using your business over a given period.
So if you’re customer revenue for a year is £400,000 and the churn rate over that same period is 10% then the total LTV is £40,000
400,000 ÷ 10 = £40K
Lifetime Value vs Customer Acquisition Cost
LTV should always be considered alongside your Customer Acquisition Cost (CAC). That’s the amount you’re spending on acquiring each customer. If your LTV is less than your CAC, you’re spending more money acquiring your customers than they’re spending – which is clearly not good.
Luckily, a high LTV typically drives down CAC as retaining existing customers is notably cheaper than acquiring new ones. In fact, acquiring new customers is typically five times more expensive than retention. While, a 5% increase in retention rate can lead to a rise in profit between 25% to 95%.
Want to know more about creating loyal customers to increase LTV? Check out our blog on creating loyal customers.
We are Velocity Juice: we help digital-first companies scale faster by offering flexible eCommerce startup and scale up funding with no equity dilution. For more information about what we do, check out our insights blog or get in touch to speak to a friendly member of our team.