The goal of any business is profit. It is important not only that it brings a lot of money, it is necessary to distribute it wisely. It is for this reason that systematic performance analysis is an integral part of a successful business. One of the main indices used by marketers is LTV.
What is LTV
LTV is an abbreviation that translates to "customer life cycle". This indicator shows how much each buyer brings money to the company for the entire time of cooperation with it.
Usually two methods of calculating this indicator are used.
- Historical, taking into account the total value of income that a particular buyer brought to the company.
- Forecast is needed to build a more complex behavioral model of the buyer. It takes into account which goods (services) are more interesting to the client, in what price range his preferences are, what is the frequency of purchases. Based on the statistical data, a forecast for the future is formed, allowing you to predict its acquisitions.
Importance of LTV
For business efficiencyLoyal customers matter a lot. Retaining them costs less than acquiring new ones. Therefore, the longer the customer life cycle, the more profitable the business.
The calculation of this indicator allows you to identify which ways to attract customers work most effectively. It allows you to abandon ineffective ones. And it also makes it possible to draw up a “customer portrait”, that is, what is the age, gender, social status of the main customers. It is important to strive to increase LTV compared to customer acquisition costs.
Separately, it is necessary to analyze the clients that bring the greatest income. This allows you to determine which consumer group they represent. Marketing analysis will help determine the optimal advertising channels and the correct presentation of information. In addition, it will allow you to revise the range of products or services, getting rid of those that are in minimal demand and adding those that are of interest to regular customers. This will extend their loy alty period.
Building a business with lifetime value at its core will give you a serious competitive advantage.
Simple calculation formula
There are several methods for calculating LTV. The specific choice depends on the specifics of the business. To calculate using the simplest method of calculation, little information is needed. Simplicity is its advantage. The disadvantage is that only basic information is obtained. In order to calculate the LTV index, you need to know how much income the company broughta specific client for the entire time of cooperation. In addition, you need to know how much the company spent to keep this customer loyal.
With these data, calculating LTV will not be difficult. In this case, it equals the difference between income and expenses.
Basic calculation formula
It is based on averages. Since the coefficient of error in applying this formula is quite large, it is recommended to apply it in segments. That is, it can be used when conducting a marketing analysis of various products.
In this case, LTV is the derivative of three indicators: the average sales value, the average number of sales per month and the average number of months of customer loy alty.
LTV with churn rate
This method of calculating the indicator is used in a business related to the sale of software products.
To calculate the churn rate, you need to divide the total number of customers who left in a month by the number of customers who made a payment in the last month and multiply by 100.
Having calculated the churn rate, you can calculate LTV taking it into account.
To do this, the average monthly income per buyer must be divided by the already known churn rate.
If the churn rate is 5%, this means that each customer retains their loy alty for 20 months. Then he ceases to be a client of the company. If athe average monthly income from one customer is 100 rubles, then the average income from each client will be 2000 rubles. (100 rubles x 20 months).
Given data on the average number of customers who cease to be customers and the value of the average check, you can calculate the average customer life cycle value index for a particular business.
If the amount spent on attracting a client equals or exceeds the value that it brings, then such a business cannot be called successful. Changes need to be made to reduce the cost of customer acquisition and increase the life cycle value. Thus, it is necessary to think about maintaining the loy alty of the client to the company for the maximum possible period.
LTV and email marketing
Sending emails is a great way to increase your LTV. At the same time, simple advertising information will not be perceived by users, and, most likely, such a letter will be deleted. Therefore, some tricks should be used. For example, high LTV high value customers can be sent a promo code that will allow them to get a good discount on their next purchase. Those who spend less money can get a more modest discount.
Mailing should be regulated depending on the period of customer loy alty. At first, you should more often acquaint him with new products and promotions. Those who remain faithful for more than a year should send letters less often and with the most valuable information for this category of buyers.
Must offer to purchase related products and accessories. A selection of recommended products can be sent by email after a customer has purchased something.
Companies that sell software, access to movies, books and music are increasingly offering subscriptions that can be purchased for a period chosen by the consumer. The subscription service allows you to improve your LTV.
Retaining a customer is always easier and cheaper than attracting a new one. Therefore, it is so important to follow its life cycle.
