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How To Easily Calculate LTV
Originally Published:  
June 29, 2022

How To Easily Calculate LTV

Customer lifetime value (LTV) is among the most critical metrics for any growing business. Earning new customers can require a lot of money. Measuring your LTV alongside your customer acquisition cost (CAC) allows you to determine how long it takes to recoup your investment. 

But there’s more to LTV than that. Learning how this metric works, calculating it, and improving it will help your business attract and retain precious customers. If you’re unsure where to start, you’re in the right place. Below, Triple Whale explains how to make LTV work for your company. 

What Is Customer Lifetime Value (LTV)? 

Customer lifetime value goes well beyond the initial purchase a customer makes. It measures how valuable a customer is to your company throughout an unlimited period. 

This metric allows you to calculate the total worth of your customers throughout entire relationships while also gaining a better understanding of cost per acquisition.

Determining LTV is beneficial for companies because it shows you how to keep existing customers around while saving money. After all, it reduces the need to spend money attempting to acquire new customers.

Calculating your LTV will also teach you how much it costs to acquire each customer and how to maximize your current customers' value.

Why Is LTV Important?  

Figuring out your LTV will reveal the monetary value of each customer. That information is essential in and of itself. However, calculating your LTV also benefits your financial forecasts and future decisions—unlike customer profitability, which provides insights by measuring past activities.

In any business, it’s critical to constantly look into the future as you choose the products you sell, find various strategies for optimizing your business, and learn how you can better serve your customers. In other words, your LTV can boost your bottom line by forecasting future activity.

You See the Impact of Your Marketing   

One advantage of LTV is that it gives you a bird’s-eye view of your marketing expenses, efforts, campaigns, and strategies. Seeing the financial impact of your marketing can reveal where change is necessary and encourage you in the areas that are working. 

You Can Set New Financial Targets

Knowing your marketing‘s financial impact will naturally enable your business to establish bigger financial targets. And if you are a small business, it will help you begin creating targets that will move your company in the right direction.

You Can Balance Short and Long-Term Goals

LTV will show you the financial return you receive from your investments. This, in turn, can help you strike a balance between your short-term and long-term marketing goals. Knowing when and how much to invest in various scenarios can do wonders for your decision-making.

You’ll Acquire Higher-Value Customers

Many marketers spend too much time chasing lower-value customers. Because LTV fosters sound decision-making, it teaches marketers how to allocate time toward acquiring higher-value customers.

It Improves Customer Relationships

In the end, knowing your LTV helps you manage your customer relationships more effectively. This management ultimately leads to higher profitability, perhaps the most significant benefit of LTV.

How Can I Calculate LTV?   

If you want to get the most from your LTV, you must know how to calculate it accurately. First, you have to determine the average purchase value by dividing your company's total revenue in a given period (usually one year) by the number of purchases made during that period.

Then, you need to calculate the average purchase frequency rate. Divide the total number of purchases made by a specific customer during the period by the number of other customers who made purchases during the same period. 

To get the customer's value once you complete the first two steps, multiply the average purchase value by the average purchase frequency rate. Then, you are ready to find the average customer lifespan, which you can do by averaging the number of years a customer has routinely bought from your company.

The final step in the LTV formula is to multiply the average customer's value by the average customer lifespan. This calculation will give you the overall customer lifetime value, which you can use to estimate the revenue you will gain from each given customer that maintains a relationship with your business.

Can I Improve My LTV?     

Yes, you can improve your LTV, and doing so will play a critical role in the long-term success of your company. Here are a few ways to begin boosting your LTV:

Simplify Your Onboarding     

If you want to increase your customer lifetime value and customer retention rate, making your onboarding process more accessible is a great place to start. 

Center your design approach around customers.  

Your customers will have online subscriptions to many other businesses other than your own. To keep your customers around for the long haul, you must design your approach around their needs and expectations. Keep relationship development at the forefront rather than focusing on sales or conversions.

Limit your data collection.

Don't allow your onboarding process to cause customer fatigue. There is simply no way to have a smooth onboarding process when requesting large volumes of data. Collect less data from your customers and apply usage pattern data to manage your marketing campaigns.

Monitor your progress and expectations.

Keep in mind that many of your users will not complete the whole onboarding process in one sitting. Break up the journey into easy, manageable steps. Establish expectations via cues in the interface, and mark customers' progress. Your customers should be able to start where they left off once they return to the onboarding journey.

Constantly improve. 

You never want to set and forget your onboarding process. While it's tempting to focus on conversion and retention rate, LTV comes down to customer loyalty and relationships. Customers, products, and the times are constantly evolving, which means that you should consistently measure, test, and assess everything you do.

Increase Your Sales

When you increase your sales as a company, it can significantly boost your LTV. Fortunately, there are many practical ways to increase sales while improving customer loyalty. 

First, you must have a deep understanding of your target audience. What types of products are they looking for? What channels are they using to find them? You can use analytics tools and a point-of-sale (POS) system to evaluate your customers' preferences and purchasing patterns.

You also must be confident in your unique selling proposition (USP). If you cannot clearly define what your business offers that no other companies can offer, make it a top priority to figure it out. Simplifying customer experience can also help you increase sales. Make it as easy as possible for customers to find and buy products on your online store. 

Moreover, go above and beyond in customer service. Your website should clearly show your company's contact information (e.g., email, phone number, chat link, etc.), and your team should respond promptly to customer inquiries and issues. 

If your current eCommerce platform is not working well for your store, consider making an upgrade. And follow these other tips to boost sales:

  • Utilize various SEO tactics to gain brand visibility and drive traffic to your website. 
  • Keep posting well-written, informative, and relevant content to your site and social media accounts. 
  • Showcase customer testimonials and reviews on your product pages. 
  • Optimize your site for mobile responsiveness.
  • Use professional photos and videos on your marketing materials. 

Focus on Brand Loyalty

While it’s essential to strategize for customer acquisition and new sales, you must not forget the bread and butter of your income. Ultimately, fostering long-term customer relationships will boost your revenue more than earning more customers. That’s why building brand loyalty by widening your scope and prioritizing customer retention should be your primary focus.

Along with constantly improving your customer service processes, work hard to position your company as an expert in your industry and field. Maintaining top-notch customer support and experience will go a long way. But you also want to regularly post authoritative content, collect customer testimonials, and grow your online presence.

The key is to do anything that can solidify customers’ trust in your brand. Here are a few other strategies to consider:

  • Start a stellar loyalty program that provides real value to repeat customers. 
  • Build an online community that caters to the needs and expectations of your target audience. 
  • Offer exclusive incentives like coupons and early product releases.
  • Maintain high quality in your products and services. 
  • Keep all of your branding elements (e.g., colors, fonts, designs, etc.) consistent throughout your marketing materials. 

Conclusion

If you want to grow your company, it’s essential to understand how customer lifetime value works. Grasping the importance of LTV for your short-term and long-term goals, learning how to calculate it, and constantly finding ways to improve it will position your business to flourish for many years to come.

While there are many other metrics to measure, it doesn’t get more critical than figuring out the value your customers can provide over time. Armed with the information and advice above, you can optimize your customer retention and determine how to develop long-lasting relationships.

Visit Triple Whale for more information on using metrics to make informed decisions for your business.

Sources: 

Financial Forecasting: A Small Business Guide | The Blueprint 

17 Strategies For Increasing Your Online Sales | Forbes

Ecommerce Loyalty Programs: Reward Customers + Drive Sales (2021) | BigCommerce  

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