What Is LTV or Lifetime Value? Complete Guide to Maximising Customer Profitability

In the era of dynamic marketing tactics, start-ups and established brands constantly look for ways to attract potential consumers and drive sales. This is necessary but focusing solely on boosting sales is not enough to ensure long-term success. Here, the concept of LTV or Lifetime Value comes in. Customer Lifetime Value is a parameter that sheds light on the potential of building ever-lasting customer relationships. Let's delve into what LTV is and how it can maximise customer profitability.

What is Customer Lifetime Value or LTV?

LTV is an indicator or metric that estimates the total amount of profit a brand can generate from a customer over the entire period of the relationship. It is beyond a number, the value reflects customer loyalty towards the brand. By calculating LTV, the company gets to know whether a customer keeps returning. This data is essential for them to secure long-term revenue.

The Importance of Customer Lifetime Value 

After exploring the definition of lifetime value,  we will now delve into knowing why CLV is important. 

Determining LTV for different user segments helps in several ways, mainly in making critical business decisions. Knowing your CLV can help you to know, 

• The maximum amount you can spend to attract new customers while maintaining a profitable relationship.
• The precise amount you can expect an average customer would spend throughout their relationship with your business.
• What types of services or products do customers want
• Which offerings have the highest chance of profitability
• Which customer segments drive the most to your sales?
• What do your loyal customers like?
• Why do they prefer you to purchase again and again?

These data can significantly boost your business’s profitability.

Customer Lifetime Value Calculation

To calculate CLV, you need a formula that is 

Customer Lifetime Value = Customer Value x Average Customer Lifespan. 

The value is the revenue a company expects from an average user to generate during their relationship with them. It is the standard formula to determine CLV. However, calculating this crucial number can be more complex than it seems. 

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Leverage the Power of LTV in Marketing

LTV or Lifetime Value offers valuable insights that help adjust your marketing strategies:

• It enables evaluate CAC or Customer Acquisition Cost 
• By comparing LTV to CAC, you can analyse whether you're overspending to attract customers.
• In addition, it helps optimise your investment in customer acquisition while segmenting your customer base
• Enables to differentiation of high LTV segments from low LTV segments.
• Adjust your perspective from driving initial sales to establishing long-term bonds.
• Focus on building customer trust in your brand and developing everlasting connections.

The Best Strategies to Improve LTV or Lifetime Value

Here are some tried-and-tested strategies to improve the customer lifetime value:

1. Make the returning procedure easy for your customers. A complex process of returning products will lead to lower customer satisfaction, indirectly losing customers in the long run.  
2. Develop strategies to hook your most loyal customers’s attention. For instance, if someone is willing to cancel a subscription you offer, give them another exciting option with a small discount.
3. Consider engaging in direct interactions with your satisfied customers to understand why they repeatedly choose your brand.
4. Make promises regarding delivery dates and fulfil them. Delivering a product by July 25, when promised to send it by August 1, is far better than the reverse case scenario.
5. Design a loyalty program for your satisfied customers. Encourage them to repeat purchases to receive rewards. It will be both attainable and desirable.
6. Keep in touch with long-time customers. Let them know you haven't forgotten them, and make the process easy to connect with you.
7. Utilise customer information to customise the onboarding process. Offer great deals on items that they have previously bought. And follow up via email to ensure their previous purchases meet expectations.
8. Another smart way to increase LTV or Lifetime Value is to improve your average order value. Suggest related complementary products when a customer is about to check out.

These are the ways brands can improve CLV that ultimately help shape business strategy to attract and retain long-term customers.

Also Read:- Understanding Engagement Rate as a Major Digital Marketing Metric

Customer Lifetime Value Example

Suppose you run an e-commerce footwear brand. If an average customer makes a purchase of Rs. 1000 worth of shoes two times a year and remains connected with your brand for four years, the CLV of that customer would be Rs. 8,000 (Rs. 1000 x 2 purchases x 4 years).

Bottom Line

Mastering LTV or Lifetime Value is crucial to embrace sustainable business growth. By acquiring a deep understanding and optimising LTV, you can ultimately build a profitable and successful business.

Want to master the skill?

Enrolling in an online digital marketing course by Amity Online. This course will equip you with the necessary skills to attract customers, enhance customer retention, and drive higher ROI.