Lifetime Value (LTV)

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What is Lifetime Value (LTV)?


Definition of Lifetime Value (LTV)

Lifetime Value (LTV) refers to how much revenue a customer is estimated to deliver, across their entire time buying from the business.

Lifetime Value (LTV) is an essential metric for certain companies, especially those with service or subscription models — like SaaS businesses. A clear read on how much the average customer should bring in across their lifetime will empower more informed marketing and sales strategy decisions, helping to increase profit and lead generation.

Who would benefit from calculating LTV?

LTV should inform almost every decision a business makes. So, in this sense, having the right metrics in place to calculate Lifetime Value is crucial for every organization.

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However, as mentioned, LTV is particularly important for businesses with long-term or subscribing customers.

Unlike companies that rely on individual purchases from multiple customers, those with subscription business models have a much higher LTV — and each new customer adds a lot to the bottom line. 

How Lifetime Value (LTV) is calculated

Naturally, the precise method of calculated LTV will differ from company to company, depending on the business model. 

That said, in the case of subscription companies — who rely on Monthly Recurring Revenue (MRR) — there is a quick calculation that can be used. Simply take the average MRR of your customers, then divide it by the percentage of customers you lose per month (also called your churn rate). This will give you a good estimate of your Lifetime Value (LTV).

General FAQ

How to calculate customer lifetime value?
Customer Lifetime Value can be calculated in different ways. To calculate the Customer Lifetime Value of a subscription business, divide the Monthly Recurring Revenue (MRR) by the percentage of customers lost each month. The result is an accurate estimation of Customer Lifetime Value. For non-subscription businesses, start by calculating the customer value: take the average value of a purchase and multiply this by the average purchase frequency rate. Next, find the average customer lifespan by working out the average number of years a customer purchases from your business. Now, just multiply the customer value by the average customer lifespan. This shows the amount of money you can expect to earn from an average customer during their entire lifetime as a buyer.
How to increase customer lifetime value?
Companies can implement a number of strategies to increase customer Lifetime Value. One is to create a high-value content strategy tailored to your audience segments, to achieve optimal engagement and retention. Email marketing, active social media presence, long-form blog posts, and regular tailored promotions may do the trick. Another option is to deliver a market-leading customer experience from the point of first contact onward. This can help you achieve higher customer satisfaction rates and maintain long-term loyalty. Finally, welcoming feedback from customers on a regular basis and taking action on it to provide a higher standard of service is crucial. Show buyers your business values their input as well as their custom.
What role does LTV play in conversion rate optimization?
Calculating the Lifetime Value of particular types of customers from across different audience segments can help improve your conversion rate optimization. Why? Because you’ll recognize which type of buyers offer the most value to your business during their relationship with you and can focus your conversion rate optimization to win more of those customers. Likewise, good conversion rate optimization can have a positive impact on new customers and make them more likely to stay loyal to your brand, increasing their Lifetime Value.

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