Making smart business decisions is all about accurate prediction. Here, we’ll be introducing you to a metric with the power to unlock countless avenues for growth, efficiency, and success: lifetime value.
What Is Lifetime Value (LTV)?
Lifetime value (or customer lifetime value) is a metric that estimates how much revenue a customer or group of customers will generate over their entire lifecycle.
LTV can be used to make estimates about:
- Customers (avg.)
- Customer Segments (e.g., 24-35 year-olds)
- Customer Cohorts (e.g., January signups)
To summarize, LTV is the metric that tells you how much revenue (or value) a customer will bring in over their lifetime.
Related: Learn everything you need about Cohort Analysis
Why Is Lifetime Value Important?
LTV estimates can be useful when making a huge range of decisions about your business, including:
LTV can help you make decisions about where to allocate your resources. For example, if you have a limited marketing budget, you can use LTV estimates to figure out which customer segments are most valuable and target those segments specifically.
LTV can also help you prioritize which new features or products to develop. If you know which features are most popular with your high-value customers, you can focus your development efforts on those features.
Finally, LTV can be used to inform your customer retention efforts. If you know which customers are most valuable, you can focus on keeping those customers happy and engaged.
Of course, making use of LTV is easier said than done, especially if you’re new to the business. Mentors—like the ones available to book through Growth Mentor—are great resources for help with LTV and other business metrics.
How to Calculate Lifetime Value
There are a few different ways to calculate LTV, but the most common method is to use a simple formula:
LTV = (Average Order Value) x (Orders Per Year) x (Customer Lifetime)
For example, let’s say that the 24-35 year-old customer segment spends an average of $100 per order and orders from your store once a month. If this segment’s average lifespan is 5 years, their LTV is $6,000.
How To Improve Lifetime Value
There are a few different ways to improve LTV, but the most common method is to increase customer retention rates.
You can also improve LTV by increasing order frequency or average order value. For example, you could offer discounts for customers who buy more than one item at a time, or you could develop new product lines that appeal to your target market.
Finally, you can also improve LTV by increasing customer lifespan. This can be done by developing long-term relationships with customers and ensuring that they’re always happy with your products or services.
Start Making the Most of Your Opportunities
Improving LTV is essential for any business that wants to grow sustainably in the long term. If you’re not sure where to start, reach out to a business mentor for guidance.
At Growth Mentor, we have a network of 400+ entrepreneurs, CEOs, and marketing experts who are ready and willing to help you grow your business.
Book a call today and see how they can help you take your business to the next level!