There are many marketing metrics related to finances — for example, ROMI. Why do you need another one, especially with such a convoluted formula? Let’s find out.
The more money one customer brings you, the higher your revenue is. That’s why LTV is connected with revenue — you can use it to predict the total profits of your company over the next month, quarter, or year.
The general CLV formula shows the value of your average customer regardless of demographic characteristics, behavior or acquisition channel. That’s why you can use it only for approximate revenue forecasts. For more precise numbers, divide your customers into groups and calculate the LTV for each segment.
CLV is the metric that depends on how long your customers stay with you and how much and how often they buy from you. But it doesn’t just show the “quality” of your customers — it shows the “quality” of your business.
If you noticed a sudden drop in CLV, the fault may not be in your customers but in your marketing strategy. In this case, you can dig deeper and look at which components of the LTV formula have changed and resolve issues. For example, if the churn rate has increased, reconsider your retention campaigns. And if the average check is lower than last quarter, sending some promotional emails to boost sales wouldn’t hurt!
Where do your most valuable customers come from? No other metric can give you an answer but LTV.
For example, if you track this metric, you might find out that PPC ads bring you more new people than emails but they mostly stay for one-time purchases, therefore, their LTV is lower. Should you keep spending your marketing budget on this channel? No, investing into the channel that brings you more long-term customers is more reasonable.
CAC stands for Customer Acquisition Cost, which is how much it costs your business to earn one new customer. And LTV shows how much money an average customer brings you. The thing is, these metrics are closely connected with each other.
CAC by itself doesn’t mean a lot — but tracking the CAC/CLV ratio is vital for every business, big or small. The absolute acquisition cost can be as large as you can afford but it shouldn’t be above the average “value” of a customer. Calculating CLV helps you make wiser financial decisions and start spending less on customer acquisition before you’re broke.
The formula is simple. Take the total sales revenue over the time period of choice (for example, one month) and divide it by the total amount of purchases over the same period.
Average check = Sales / Purchases
Sometimes you don’t know the average lifetime of your customers. In this case, calculate it using a different metric — churn rate:
Lifetime = 1/Ch
where Сh stands for churn rate. The formula is the following:
Ch = (CB – CE)/CB х 100%
where CB is the number of customers at the beginning of the time period of your choice and CE is the number of customers at the end of the said period.
LTV is one of the metrics that helps you estimate how efficient your marketing strategy is. But lifetime value alone won’t show you the full picture. We’ve got you covered — check out our
