what is Lifetime Value and how to calculate it?

Inbound marketing has brought many changes within marketing, we have gone from focusing strategies on the product to focus on the customer, and with this comes a series of new metrics to optimise the strategy, such as Lifetime Value.

what is Lifetime Value?

Lifetime Value is a marketing metric that we could translate into English as Total Customer Value. What this metric measures is the benefit that it is believed that a customer will bring us throughout the entire relationship that the company will have with him, from the moment he becomes a lead until the end of the relationship.

Thanks to this metric we can find out several things:

1. On the one hand, we will know if the business model we are using is viable or not.
2. On the other hand, this metric helps us to find out if the costs you are defining to attract customers are correct or if, on the contrary, you are losing money.

This calculation in general is a forecast as we cannot know how long a customer will stay with us, nor can we know how often the customer will buy or how much they will spend on each purchase.

In short, Lifetime Value is the term used to determine the lifetime value a customer brings to the company.

Lifetime Value Formula

There are different formulas for calculating this value, but the simplest of them all is as follows:

LTV: Average Spend x Recurrence of Acquisition x Life of Customer

We have to multiply the average customer spend by the recurrence of product acquisition during a year multiplied also by the life of the customer. This KPI is very important within the business as the probability of selling to a potential customer, i.e. one you have not sold to before, is between 5% and 20%, while for a customer you have already bought from once, the percentage will be between 60% and 70%.

This is very important for costs, as it is very important that the customer acquisition cost is always lower than the lifetime value, otherwise, it would cost more to acquire them than what we are going to get from them in terms of profit.

There are other formulas for calculating Lifetime Value, another very common one is as follows:

LTV: Average monthly revenue per customer x Average number of months of relationship with a customer.

To use this formula, the data you use in it, such as revenue and lifetime of your customers, must be reliable data, otherwise you will not get the right result. On the other hand, it is not enough to have data from a couple of months ago, you need a good history of that data so that the calculation can predict the future.

Advantages of Lifetime Value

The goal of most businesses is to get as many leads as possible, and Lifetime Value is a formula that helps us to optimise our lead acquisition strategies to the maximum, obtaining the highest possible rate of return.

1. Generate ROI
   By calculating the value of each customer, we will know how to obtain the highest possible profit by spending only what is necessary in our strategy, thanks to this we will also know which customers to target, thus obtaining even more profit. If we invest little and earn a lot, the ROI will be high.
   
   
2. You can improve retention marketing
   Thanks to the Lifetime Value, we are calculating the importance that each customer has for our business, not only what they spend on us, with this data, we will know how to implement our retention marketing strategy, which customers to focus on, how much to invest in it, and so on and so forth.
   
   
3. Optimise results
   The Lifetime Value calculation is, obviously, a long term calculation, with this you will have a balanced view of the business knowing at all times how your sales strategy is developing.
   
   
4. Significant increase in profits
   Thanks to the Lifetime Value, we will not only be getting new customers, but we will also convince customers who have already bought from our business to do so again or even to increase the amount of products they usually buy, which is why this Lifetime Value helps enormously to build user loyalty, making them much more satisfied with our products or services.
   
   
5. Segmentation and targeting
   Thanks to Lifetime Value, we are segmenting customers depending on which ones are more profitable for the business and which ones monetise more, thanks to this we can focus our strategy on those who are the best customers, making them loyal or even increasing their level of purchase. This also helps us to create different campaigns depending on the type of customer we are targeting.
   
   
6. Improve customer service
   To calculate the Lifetime Value, you have to use a series of data, this data has to be obtained previously, it is part of the process, and it will not only help you to calculate the Lifetime Value, but also to know more about your users, you will know which products they usually buy, how often and since when, which will help enormously to direct the strategy towards their tastes and needs, thus improving the relationship with the customer and the attention you give them.

We can say that Lifetime Value is one of the most important KPIs in marketing today, especially since the customer has become the centre of the business. What we are obtaining with this KPI that we are not obtaining with others is a long-term vision.

Above all, it has a great impact on companies that have a large amount of data, by having a minimum history and using this KPI, you will get enough information to make the right decisions, with less probability of error the more data you have. The customer is the centre of any marketing strategy, our success or failure depends on him, which is why it is very important to take into account the Lifetime Value, as it will allow us to obtain the greatest possible amount of income.