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.
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:
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.
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.
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.
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.