LTV "LIFE TIME VALUE" OR LIFETIME VALUE OF A CUSTOMER

Accelerate your business with these LTV (Life Time Value) tips. Analyse and discover this TIP!

WHAT IS LTV?

The customer lifetime value (or customer lifetime value) indicates the gross margin that we obtain from each customer throughout the time they are with us. This last part is important, as it is not the margin of the one-off sale but the margin that we expect to obtain during our future relationship. This implies that we have to not only assess how much margin their current purchase has left us, but also predict how much their future purchases will leave us, which is not easy. LTV stands for Lifetime Value. A metric used to assess the value that a customer brings to a company throughout its business relationship with the company.

WHY IS LTV IMPORTANT?

Because it allows us to assess how profitable a customer is during their relationship with us, which is key when set against what it has cost us to acquire them (acquisition cost).

HOW IS LTV CALCULATED?

It is one of the most complex values to calculate and in order to do it correctly we need to be able to do so:

• Average revenue of the client in each period (e.g. per month)
• Gross margin percentage of each transaction (discounting direct costs of serving the tooth)
• Life cycle (the average time the tooth will be with us, as we have seen when talking about the chuco). 

LTV = ( Average revenues/month x average gross margin) x blind life in months 

There are much more complex models that take into account aspects such as holding costs or even currency depreciation, but I think the one above gives us a good initial idea. LTV is calculated by determining the total value of all purchases a customer makes with a company over its lifetime. This can be several years or even decades. It also takes into account the frequency of purchases and the average value of each purchase. The LTV calculation can be expressed as a monetary figure or as a percentage of profit. LTV is important for companies because it allows them to determine the return on investment they can achieve over the long term with a customer. If the LTV of a customer is high, then the company can justify the cost of acquiring and retaining that customer. In addition, LTV can help companies identify opportunities to increase customer value through cross-selling or offering additional services. To maximise LTV, companies can focus on improving the quality of customer service, personalising the customer experience and developing a long-term customer relationship. They can also focus on retaining existing customers and building loyalty through loyalty programmes and exclusive offers.

In short, LTV is an important metric that companies can use to assess the value a customer brings to their business over the long term. By understanding and maximising LTV, companies can increase the profitability and sustainability of their business.

Practical examples of ltv calculation in new companies

Here are some practical examples of LTV calculation in new companies:

SaaS (Software as a Service) company:

Suppose a new SaaS company offers a project management software service to its customers. The company charges a monthly fee of $100 to each customer. Assume that the average customer lifetime value is two years and the customer retention rate is 90%. The LTV calculation would be:

LTV = ($100 * 12 months * 2 years * 0.9) = $2,160

This means that the lifetime value of each customer to the company is $2,160. If the company can acquire and retain customers at a cost lower than the LTV, then it can earn a positive return on investment.

E-commerce company:

Suppose a new e-commerce company sells beauty products online. The average value of a purchase is $50, and the average number of times a customer makes a purchase is 4 times a year. The average customer lifetime value is 2 years. The LTV calculation would be:

LTV = ($50 * 4 times a year * 2 years) = $400

This means that the lifetime value of each customer to the company is $400. If the company can acquire and retain customers at a lower cost than LTV, then it can earn a positive return on investment.

Service company:

Suppose a new home cleaning service company charges $150 per visit. The average number of visits by a customer is 2 times per month and the average lifetime value of the customer is 3 years. The LTV calculation would be:

LTV = ($150 * 2 times per month * 12 months * 3 years) = $10,800

This means that the lifetime value of each customer to the company is $10,800. If the company can acquire and retain customers at a cost lower than the LTV, then it can earn a positive return on investment. In a nutshell, The calculation of LTV can vary by type of business, but is generally based on the length of the business relationship and the average purchase value of a customer. By understanding LTV, new businesses can determine the return on investment they can achieve over the long term with a customer and make informed decisions about customer acquisition and retention.

Case study with LTV

The following is a case study for an entrepreneur to calculate the LTV of his new company:

Suppose an entrepreneur has launched a new business selling gardening products online. Customers buy seeds, plants, tools and other gardening supplies through a website. The entrepreneur wants to calculate the LTV of an average customer for his business.

The available data are as follows:

• Average value of a purchase: $50
• Average number of times a customer makes a purchase per year: 6 times
• Average customer lifetime value: 3 years

The following formula can be used to calculate the LTV:

LTV = Average value of a purchase * Average number of times a customer makes a purchase per year * Average lifetime value of customer

Applying the formula to the example:

LTV = $50 * 6 times per year * 3 years = $900

This means that the lifetime value of each customer to the company is $900. If the company can acquire and retain customers at a lower cost than LTV, then it can earn a positive return on investment. To maximise LTV, the entrepreneur can focus on improving the quality of customer service, personalising the customer experience and developing a long-term relationship with the customer. It can also focus on retaining existing customers and building loyalty through loyalty programmes and exclusive offers. By understanding and maximising LTV, the entrepreneur can increase the profitability and long-term sustainability of his business.