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How much should you spend to keep a customer around? Find that customer’s lifetime value, and you’ll have your answer.
Customer lifetime value (LTV) refers to how much value you can expect a specific customer to provide your business over their entire lifetime. It requires you to determine how much revenue the customer will generate and how long they will likely buy from your company.
In other words, the longer a person does business with you, the more loyal they will prove and the more products they will buy. Customers who interact with you less frequently and make smaller purchases will spend less money with your business over time.
If you’re wondering what LTV has to do with your marketing strategy, remember that it costs a lot more money to acquire new customers than it does to retain your current ones. That’s why Triple Whale has shared everything you need to know about LTV and digital marketing:
Essentially, LTV is the total worth of a customer to a business over the entire period of their relationship. Because it costs much less to retain existing customers than to gain new ones, LTV is a critical metric for any digital marketing strategy. Maximizing the value of your current customers is a tried-and-true method of driving growth.
That's not to say that learning the LTV does not help you acquire new customers. It benefits both retention and acquisition efforts without harming profit margins.
LTV is distinguished from the Net Promoter Score (NPS) and the CSAT. The NPS measures customer loyalty, while the CSAT measures customer satisfaction. The difference is that LTV is tangible because it links directly to revenue instead of the intangible hopes of loyalty and satisfaction.
Customer lifetime value is always a work in progress. To calculate LTV, you must determine the average sale and the gross profit margin per sale. Then, you must decide how many times the typical customer buys from your business. Therefore, if your average sale is $600 and you would profit $120 from the sale, and the customer purchases eight times from you, the LTV would be $960.
Calculating that number puts things into perspective. It allows you to decide how much money you are willing to spend on a customer that will bring $960 in the end. Knowing the LTV will enable you to explore your options.
For example, should you try to increase the number of purchases from a customer, or should you focus your energy on increasing the average sale? What if you found a way to raise your profit margin on each sale or added products to your lineup? Could you develop a referral process for your company?
Figuring out LTV can spark a process of reevaluating and transforming your targeted marketing initiatives, which can take your company to the next level.
There are several LTV formulas to consider for your digital marketing strategy. But first, it will help to understand a few marketing metrics:
Say, for instance, that the total revenue in Year Two is $1,000 and the total number of customers in Year One is 120. Also, 90 of the customers in Year One bought from your business in Year Two, and the total number of Year Two customers is 180.
In that case, your Year Two ARPU would be $5.56 ($1,000 / 180). Your retention rate would be 75% (90 / 120).
Your churn rate would equal 25% (1 - 75%).
Now, let’s discuss the basic LTV formula, which you can break down into two different formulas:
Using the first basic LTV formula, your LTV will come to $22.24 ($5.56 / 25%). Using the second formula will require you to estimate how long a customer will purchase from your business.
To do that, you will need to have years of data to analyze, research customer behavior in your industry, or extrapolate customer behavior from your existing data.
Another formula is the LTV formula with profit margin, which can prove beneficial when experiencing solid revenue. To figure out how much profit a specific customer will bring, simply multiply the basic LTV by your profit margin.
Say, for instance, that your profit margin is 20%. You would multiply your basic LTV by 20% to reach the LTV with a profit margin. In our previous example, this would mean multiplying $22.24 by 20% to get $4.45.
The traditional LTV formula factors in the rate of discount. The discount rate refers to the interest rate you would implement in a discounted cash flow. The traditional LTV formula uses the Average Gross Margin Per Customer (LTV with a profit margin). Here is the formula:
Traditional LTV = Average gross margin per customer X (retention rate / 1 + rate of discount - retention rate)
Using the previous example, your average gross margin per customer is $4.45. Let’s pretend that your rate of discount is 10%.
If your retention rate is 75%, you would find your traditional LTV by calculating: $4.45 X (75% / 1 + 10% - 75%) = $9.52
Because LTV measures the total value of a specific customer over your entire relationship, it is heavy on retention. This means that it carries significant weight for ecommerce businesses and provides valuable insight as long as you can accurately predict the likelihood of the customer making other purchases.
Remember that LTV is affected by how you price your products, marketing costs, operating costs, and other factors. As an ecommerce business, it is challenging to determine precisely how much potential customers are willing to pay.
Along with conducting extensive market research, you must test prices, review your sales, and ask your customers for feedback. Once you have figured out how to obtain accurate LTV calculations and price your products, you can use the data to move your company in the right direction.
There is no shortage of methods for measuring customer LTV, but using tools is the best way to keep track of key metrics. We have listed a few metrics below to help you monitor LTV using Google Analytics.
Know that these are not universal metrics, so some companies find specific metrics more valuable than others. The key is to determine which metrics can help your team the most. Now, let’s take a look at some metrics worth tracking to manage your customer LTV:
The app views per user on Google Analytics will inform you of how many people used your app over a specific time. This is an essential metric if your company uses a mobile app to conduct business.
If you post a lot of blogs on your website, you may find page views per user a helpful metric in tracking customer LTV. After all, if a person invests time and energy into reading your posts or pages, they are more likely to buy from your business and become a repeat customer.
When using Google Analytics, you will establish your marketing and sales strategies goals. Your specific goals depend on what type of business you run. For example, if you own an ecommerce website, you will have different goals than a site that relies on blog posts. Determine your objectives to start tracking the goal completions per user.
One of the most important metrics to measure as an ecommerce business is revenue per user. Set up your ecommerce features in Google Analytics, and this metric will help you determine how much income your website is generating.
The sessions per user metric on Google Analytics shows you how many times each user visits your website. If an individual visits your site repeatedly, it indicates that they love your site, leading to them buying more and more of your products.
This metric tells you how much time a specific individual spends on each page of your website. The longer the session's duration of a potential customer, the more likely they will convert and become loyal customers. This is a metric that you want to see increasing.
Transactions per user typically falls in line with your website’s conversion rate. It essentially informs you of how much activity and revenue is occurring through your app and site.
There are countless ways to use LTV to improve your digital marketing strategy. For example, you can focus on providing an enhanced customer service function. Using LTV data to boost customer experience will increase customer satisfaction and bring in more referrals.
You can also use LTV data to produce better content and landing pages, enabling you to answer questions from your customers and potential customers before they even ask. Furthermore, you can engage in list building for leads and customers who already know and love your brand.
By harnessing the online world's power, all the tools available, and LTV data, you can provide customers with something new.
A person who spends more money for a longer period at your business will prove more valuable than others who only make small or infrequent purchases.
Consider the tips and information above for calculating customer LTV, and use the data to improve your marketing and sales strategies.
As you track all the essential metrics, don’t forget to use an ecommerce operating system like Triple Whale for a streamlined experience!
Sources:
What Is Customer Satisfaction Score (CSAT)? | CMS Wire
Profit Margin, Gross Marin, and Net Profit Margin: A Quick Guide | HubSpot
Google Analytics 101 - Improve Your Online Business by Understanding Essential Data | SCORE
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