When measuring the success of your marketing and other campaigns, lifetime value is a key metric to calculate. You'll want to measure both lifetime value and customer lifetime value to identify and market to the most valuable new and existing customers. Here you'll learn more about this metric and its importance for any business.
Lifetime value, or LTV, is the total amount of money that all your customers are worth. Businesses can use this metric to project the overall value of customers over time, including the specific benefits or income they'll generate. You can also use LTV to calculate the total value that customers have already brought to your business. Ultimately, LTV is ideal for determining the total value that each customer provides, which you can use to target the right audiences.
In addition to LTV, you might be curious to know what customer lifetime value or CLTV is and if it's the same as LTV. Although LTV and CLTV are similar, there are slight differences to keep in mind.
The LTV measures the total net profit that a relationship produces between the product or service and the customer. Meanwhile, CLTV measures the current value of a single customer according to their previous and anticipated purchases. In other words, LTV is collective and takes the total spending of all customers into consideration. CLTV, on the other hand, considers the individual customer.
Both of these metrics are equally important when measuring the results of your efforts.
Not sure how to calculate lifetime value? You can calculate CLTV using multiple formulas, depending on the values you specifically want to measure. The following are some of the most commonly used CLTV calculations that can help determine various figures based on past and future customer interactions.
You can calculate the average purchase frequency rate (APFR) to give you the average number of purchases during a particular period. The formula is as follows:
Number of Purchases / Number of Customers in a Given Period = Average Purchase Frequency Rate (APFR)
This formula will indicate the average value of purchases within a specific sales period. The formula will look like this:
Total Revenue in a Given Period / Number of Purchases = Average Purchase Value (APV)
You can calculate the total value of your customers by using the following equation:
Average Purchase Value (APV) x Average Purchase Frequency Rate (APFR) = Customer Value (CV)
You can also calculate the average lifespan of your customers throughout their interaction with your brand and offerings. Use this formula to calculate ACL:
Total Customer Lifespans / Number of Customers = Average Customer Lifespan (ACL)
Using APV, APFR, and ACL based on the above formulas, you can calculate your CLTV. You can easily calculate this metric for individual customers using the following formula:
Average Purchase Value (APV) x Average Purchase Frequency Rate (APFR) x Average Customer Lifespan (ACL)
If you're looking for a clear example of an LTV calculation, there's a popular example based on a Kissmetrics report that studied Starbucks's measurement of the lifetime value of a customer. In the study, Kissmetrics looked at the buying behavior of five Starbucks customers and calculated their average value.
In the study, Kissmetrics concluded that customers spent an average of around $5.90 every time they visited a Starbucks location. They came to this number by calculating the average purchase value using the aforementioned formula for APV. This involved using the APV formula for each of the five customers in the study, followed by dividing the total of each customer's APV by the total number of customers.
After calculating APV, the study calculated the average purchase frequency rate based on the number of visits the average customer made to Starbucks locations within a single week. According to the report, the average APFR among the five customers was around 4.2 visits.
The next stage of the study calculated the average customer value, specifically the ACV per week. The first step of this calculation involved multiplying each customer's APV by their APFR. Repeating this formula across all customers yielded an ACV of $24.30.
Additionally, the study found that the average customer lifespan for Starbucks was 20 years based on these customers. The final value gave Starbucks their customer lifetime value calculation based on 52 weeks in a year, which helped calculate the annual CLTV.
As such, the calculation multiplied 52 by the $24.30 ACV and the ACL of 20 years, bringing the total CLTV for Starbucks to $25,272.
You must not underestimate the importance of customer lifetime value when it comes to helping your business. Your CLV can indicate the overall health of your business and predict its long-term performance.
One of the main reasons CLTV is important is its impact on your bottom line. Businesses may make the mistake of focusing primarily on acquiring new customers, but repeat business from existing customers is just as important. If you work toward maximizing CLTV and LTV, you'll be able to get more repeat orders from your customers, which substantially boosts profitability.
Having a high CLTV/LTV also means that you're getting a steady revenue stream, which will help cover costs to keep you in business, including overhead expenses. If you know that you can expect a certain amount of steady income, you'll be able to incorporate this into your budgeting strategy.
Ultimately, a high CLTV also means that your company will have a better chance of growing over time. With more steady revenue, you can invest in elements of your business that facilitate gradual growth and expansion.
Whether working to optimize LTV in marketing or other areas of your business, your CLV will depend on three main factors as discussed: Your average purchase value (APV), your average purchase frequency rate (APFR), and your average customer lifespan (ACL). Calculating these figures will help you calculate your total CLTV.
You can improve your business or app lifetime value in a few key ways:
When acquiring new customers, you should make the onboarding process as engaging and painless as possible to ensure customers keep interacting with your brand. You should give customers everything they need, including educational materials and gamified onboarding progression. Additionally, make sure your onboarding process is personalized to connect with people on an individual level. In taking these steps, you can bring more customers on board and retain more of them in the long term.
Customer service is another huge factor to consider when looking to improve CLTV. According to Salesforce, 89% of consumers are more eager to make repeat purchases from brands following a positive customer service experience.
If you can optimize your customer service practices, you'll be able to more effectively optimize LTV and CLTV. You can do so by providing 24/7 live chat services, consistently monitoring social media and any complaints that customers have, and providing a self-service resource for customers who need assistance.
The definition of a good LTV or CLTV will vary from business to business. You'll need to consider customer acquisition cost (CAC) and other factors such as your industry. Depending on the nature of your business, it might cost more to acquire a new customer, leading to a higher CAC and a subsequently higher goal for LTV. Consider the factors affecting your business to calculate the ideal LTV that allows for long-term growth and success.