Lifetime value (LTV) or customer Lifetime value (CLTV or CLV) is a prediction of the net profit attributed to the entire future relationship with a customer. It’s a way of measuring the value of a customer over the course of their lifetime. It is an estimation of the total amount of money that a customer will spend on a company’s products or services over the course of their lifetime.
To calculate lifetime value, companies take into account factors such as the average purchase value, the number of repeat purchases, and the customer retention rate. For example, if a customer’s average purchase value is $50, they make 10 repeat purchases per year, and the customer retention rate is 80%, the customer’s lifetime value would be calculated by multiplying the average purchase value by the number of repeat purchases per year by the customer retention rate.
In simple terms, lifetime value is a measure of how much money a customer will spend on a company’s products or services over the course of their lifetime. It’s an important metric for businesses as it helps them understand the value of their customer base and make informed decisions about marketing, sales, and customer service.
Lifetime value (LTV) is important for a number of reasons:
- Customer acquisition cost: LTV can be used to measure the effectiveness of customer acquisition efforts. By comparing the customer acquisition cost to the lifetime value of a customer, companies can determine whether their marketing and sales efforts are producing a positive return on investment.
- Business forecasting: LTV can be used to forecast future revenue and profits. By understanding the lifetime value of a customer, companies can estimate how much revenue they can expect to generate from a particular customer over time and make more accurate business forecasts.
- Resource allocation: LTV can be used to determine where to allocate resources, such as marketing and customer service. By understanding which customers have the highest lifetime value, companies can focus their efforts on retaining and growing those customers.
- Product development: LTV can be used to identify product development opportunities. By understanding which products or services generate the highest lifetime value, companies can focus their development efforts on creating new products or services that will generate the most revenue over time.
- Retention: LTV helps companies to identify which customers they should focus on retaining. Customers with high lifetime value are more profitable and therefore, it makes sense to invest more resources to retain them.
- Churn rate: LTV helps companies to monitor the churn rate (the rate at which customers cancel or stop doing business with the company) , this is important because losing a customer with a high LTV can have a significant impact on a company’s revenue.