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Lifetime Value (LTV): Learn To Calculate This Metric Correctly

Have you ever wondered what your customers are worth?

If before you had no idea how to answer this question, in this text you will learn about an essential metric that will give your answer: Lifetime Value (LTV).

Follow the article to learn what this metric is, its importance, how to calculate it and much more!

What is Lifetime Value?

Lifetime Value (LTV), or Lifetime Value - when translated -, is nothing more than an indicator that defines the value of your customer's life cycle .

LTV is how much revenue each specific customer will bring to the company (in purchases or recurring payments) while maintaining a relationship with the company.

That is, with this metric you will know the value of your customer.

Continue in the text to learn how to do this calculation!

The Importance of Lifetime Value for Your Business

Lifetime Value helps you understand the financial health of your business .

This metric directly affects the future decision making of your strategies.

Below are some more reasons that highlight the importance of this indicator, check it out:

  • Shows your company's connection to your market;
  • Informs when a customer will become profitable, exceeding the investment that was made to win it;
  • Informs which publics to invest in ;
  • Represents the limit of money spent to acquire new customers;
  • Encourages companies to shift their focus to the long-term health of their customer relationships;
  • Qualify your customers;
  • Helps to find faults that lead customers to give up on the service too soon; and
  • Finds underutilized opportunities to improve acquisition and retention.

Aside from all these points, LTV makes it easy to calculate other metrics such as ROI .

What is the Ratio between LTV and CAC?

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In fact, there is no exact answer to this question, because each business faces a different reality in terms of profit margin, number of sales and CAC.

However, it is very important to keep in mind that it is Lifetime Value (LTV) that supports the cost of customer acquisition (CAC) , that is, LTV must always be higher than CAC.

After all, if your business spends roughly the same amount to win a customer as the money the customer spends with the business, you're going to be out of profit.

Stay tuned:

  • LTV by profit: if higher than โ€œ1โ€, it means that in this period the operation pays the cost of acquiring the customer; and
  • LTV by billing: must be greater than 1.

Learn to Calculate Lifetime Value Without Hassle

There are many different ways to calculate LTV, as this metric has a different look depending on the industry, the types of contracts offered and the purpose of the calculation (for example, if you want to know the history of your customers or make a forecast for the future).

So don't be alarmed if you find other formulas out there. ๐Ÿ˜…

In this post, we will show you the most common ways to calculate LTV: one simpler, and one more complex.

To find out a customer's Lifetime Value, simply plug the numbers into the following formula:

LTV = Average customer ticket ร— Average customer purchases per year ร— Customer relationship lifecycle

For example, if a customer's average ticket is R$300 and he makes about 12 purchases throughout the year, in 3 years of relationship with the company, his LTV will be R$10,800.

LTV = BRL 300 ร— 12 ร— 3 = BRL 10,800

Ah, remember to always use the same measure of time in your calculations (days, weeks, months, years, etc).

You can also apply this formula by averaging the metrics of all your customers to arrive at an average company LTV.

LTV = Average company ticket ร— Average purchases of all customers per year ร— Average customer relationship lifecycle

But there is still a second way to find out your company's LTV, which provides a more complete view of the business by inserting other metrics into the Lifetime Value calculation.

In addition to the information that we already used in the previous example, you will need to have the following data at hand:

  • Gross Margin: Shows which part of the customer's purchase is profit and which part is cost. Gross margin can be calculated with the following formula: Gross Margin = (Total Revenue โ€“ Cost of Sales) รท (Total Revenue).
  • Customer Acquisition Cost (CAC): This is the average amount you spend on acquiring a customer and includes everything from marketing and advertising to discounts and incentives. The account is as follows: All acquisition costs for the period รท Number of acquired customers.

In this case, the LTV formula looks like this:

LTV = (Average company ticket ร— Gross margin ร— Average purchases of all customers per year ร— Average customer relationship lifecycle) โ€“ CAC

To make it easier for you to understand, let's put hypothetical numbers in this formula.

Suppose your company's average ticket is R$300, and your customers pay a recurring monthly fee (so the average customer purchases is 12 times a year).

Most customers stay with you for 3 years (average lifecycle is 3 years).

Your gross margin, considering the costs you have each time a new customer enters the base, is 70% (70% revenue, 30% cost).

Finally, the cost to acquire a new customer (CAC) is R$120.

Let's do the calculation:

LTV = (R$300 ร— 70% ร— 12 ร— 3) โ€“ R$120 = R$7,440

Note that, using the same numbers as in the previous formula and adding the gross margin and the acquisition cost, we arrive at a lower value, but closer to the real one.

There are also formulas to calculate the Lifetime Value that consider Churn Rate, Monthly Recurring Revenue (MRR) โ€“ among other indicators.

What is the Meaning of a High LTV?

If your company has a high Lifetime Value, it means that the customer is making a profit for your business and that your relationship with them is lasting .

That way, you realize your business is succeeding in keeping customers, a fact that is becoming increasingly difficult these days.

What is the Meaning of a Low LTV?

Now, if your LTV is low, especially when compared to other metrics such as CAC, you need to worry, as the chance your business is making a loss is high .

So stay tuned and follow the text to see tips on how to increase your LVT!

Key Indicators in Monitoring Lifetime Value

We have previously explained how important it is for you to calculate LTV while tracking other indicators, as this makes your analysis much more in-depth.

Just below, we separate three more metrics for you to compare, let's go to them!

Churn Rate

The churn rate , or abandonment rate, corresponds to the number of customers who cancel your product/service per month .

Be aware: the higher the churn rate, the worse your LTV will be.

Customer Acquisition Cost

Customer Acquisition Cost or CAC, as we talked about above, measures the amount your company is spending on each closed sale .

So remember, CAC must always be below LTV for your business to make a profit.

Average ticket

Finally, the average ticket indicates the average amount each customer spends on your products/services .

If your average ticket increases, so does your LTV.

7 Tips to Increase the Lifetime Value of Your Business

Now that you already know everything about LTV and what this indicator involves, let's go to the tips to improve this metric even more.

1. Invest in Content Marketing

Whenever possible, invest in creating quality content, this way there will be greater attraction, engagement and customer loyalty.

Take advantage of the various channels and materials, such as:

  • Blog (optimized for SEO);
  • Social networks;
  • E-mail marketing;
  • E-books; and
  • Landing pages.

2. Work on Customer Loyalty

Don't treat your customers with indifference, give them priority, that way, your company will have the same return.

Pay attention to customer relationships , service , product/service quality and after-sales actions .

3. Have a Customer Success team

A customer success team goes beyond customer service.

All the smallest details will be handled by her, ensuring that the after-sales takes place in the best possible way.

The main point of this tip is: ensure that your customer is always satisfied with the purchase made .

4. Create a Loyalty Program

By creating a loyalty program, you make sure that the customer always has a reason to buy from your business again .

You can offer bonuses with every purchase or generate a points system, for example.

5. Focus on the Most Valuable Customer

First of all, identify which customer brings the most profit to your company , once you have an answer, focus your efforts on it.

You can create campaigns or personalized content, so your relationship gets stronger and stronger.

Also invest in marketing campaigns to bring in other customers like this one.

6. Bet on Innovation

The market is always changing and innovating, especially technologically, so don't fall behind your competitors.

Invest in continuous innovation , as your customer will continue to follow trends.

7. Focus on Service Quality

This tip refers to what we already talked about in items 2 and 4.

If your customer has a problem or question, you need to serve him as soon as possible and show that you are there to help him , otherwise he will most likely not buy from your company again.

And what's worse: a negative review decreases your chances of gaining new customers.

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