What is lifetime value (ltv) and how to calculate it

What is Lifetime Value (LTV)?

The lifetime value of a client is a metric that helps you know the revenue value of a client in the future in your brand or company. That’s to say during the whole time that customer buys your products or services, starting from their first purchase or contract.

This way, you can determine whether the investment in your marketing strategies is actually yielding results and if you need to change anything. A sign that everything is going well is when the Customer Acquisition Cost (CAC) is lower compared to revenue you get from them, basically the LTV.

This is key for any company, given that it’s not profitable at all to invest so much in attracting and keeping customers without getting anything out of it. Remember: one of your primary goals in marketing and communication strategies should always be to maximise ROI (return on investment).

Apart from the value of net revenue a customer brings you, lifetime value considers other factors that can help you specify the time and budget you should dedicate to each client.

Some examples are:

–If the client gives you ideas or feedback that can help you improve your product or service.

-If the client talks positively about you or tells others about you.

-The number of contacts, followers, and the client’s activity on social networks.

How to calculate lifetime value

The two main methods for calculating LTV are:

–Historical Customer Lifetime: this is measured using the data from all past purchases from that specific client. It’s based on information from a period of past time.

–Predictive Customer Lifetime: this predicts the amount of revenue the client will generate, based on past transactions and on behavioural patterns of that customer. The predicted values will become more and more accurate with each purchase and interaction with the client. This is considered to be the more comprehensive method when calculating LTV.

LTV Formulas

There are many formulas that can help you calculate lifetime value, but all depend on a certain number of variables that are measured, and the method chosen. Below are two simple options you can use to calculate LTV.

1. Add up the revenue earned from a customer, which is obtained by multiplying the annual revenue by the average life of the customer, and then subtracting it by the initial investment it took you to acquire that revenue.
2. Multiply the average expenditure made by the customer with each purchase by the recurrence of purchase over a year and then multiply it by the lifetime of the customer

Here’s a brief explanation of how LTV works: