What is LTV?
LTV stands for Lifetime Value. Literally translated, the term means “lifetime value.” In fact, the metric represents the net profit brought in by a customer during the time they buy from you.
Think of LTV as the metric that shows how much a customer buys from your company in terms of products and services during the time they are associated with your brand.
By analyzing this value, you can consider the relationship between the customer acquisition cost and how much profit they bring during the time they are associated with the company.
LTV can be used in various circumstances, for example, to define strategies that help increase this revenue and customer retention.
How to calculate it?
To calculate LTV, it is important to know the average ticket value and the average time your customers are associated with your company.
The LTV formula:
LTV = average ticket value x customer retention time
To find the retention time, you need to multiply the number of cancellations by the period. Then, add them up and divide by the total number of cancellations.
Another option is to use the following formula:
LTV = (average ticket x average purchases per customer per year) x average relationship time
Let's assume you have a company that sells a subscription service and that one of the monthly plans costs R$400.
Since the amount is paid every month, the average number of transactions per customer per year will be 12 (1 per month).
Let's assume the average relationship time is 2 years, considering from the purchase to cancellation.
The formula would be as follows:
LTV = (400 x 12) x 2
LTV = R$9600
This amount represents the total value invested by a customer in your company.
In the case of stays shorter than 1 year, multiply the average ticket by the total number of purchases.
What is the importance of LTV?
Understanding and analyzing your LTV frequently helps define the best sales and marketing strategies to reduce customer acquisition costs and improve the retention level in your company, in addition to encouraging customers to spend more and for longer.
Another important point is that LTV allows you to find your most valuable customers, investing to keep them.
Thus, you will be able to focus your resources on acquiring and retaining high-value customers, capable of increasing your profitability.
But that's not all. Analyzing LTV from time to time still helps to:
- Define the maximum marketing budget, avoiding spending too much on acquisition and ending up losing money in the long run;
understand how much revenue you can expect for the coming months, according to your LTV and sales history;
- Find the flaws that lead customers to give up on your service before the average hiring time;
find opportunities that help improve retention and customer acquisition.
How to analyze?
To correctly evaluate this metric, it is essential to analyze LTV within a context. That is, compare this data with other equally important indicators, in order to better understand the context.
Other metrics that should be evaluated together with LTV are listed below.
Churn rate (abandonment rate)
The churn rate is the one that measures the number of people who cancel your service or product within the month. If churn is high, your LTV will be bad. Thus, it is important to evaluate the churn rate in isolation.
If this metric is very high, you need to think about why your customers are leaving the company, such as: service that does not meet expectations, price much higher than the competition, difficulties using the product or service, among other issues.
Average Ticket
The average ticket is quite important information, since it is also used in the calculation of LTV. When you evaluate the average ticket alone, you can find opportunities to increase the amount received per customer.
When the average ticket goes up, LTV also increases.
Customer Acquisition Cost (CAC)
CAC is one of the most important metrics when analyzing LTV, after all, it shows how much was spent by marketing and sales to convert each customer.
A CAC very close to or higher than LTV indicates problems for the financial health of the business. Ideally, CAC should always be lower than LTV, because it makes no sense to spend more to acquire the customer than they consume in your business.
It is impossible to determine an ideal ratio between LTV and CAC, since each company has a different reality regarding contribution margin, number of purchases, CACs, and other data.
To calculate CAC, use the formula:
CAC = total cost of customer acquisition / total new customers.
How to improve the LTV of your business?
After calculating LTV and analyzing it alongside other metrics, did you notice a need to improve this number? We have separated the most important tips for this. Check it out!
Know your customer
How can you retain a customer you don't know? Therefore, the first step is to invest in technologies and actions that help you better understand your consumers, analyzing important points such as:
purchase history;
behavior;
preferences;
seasonality;
economic data (income, education, location, etc.);
among others.
The more knowledge you have about your customers, the easier it will be to think of loyalty strategies that really work for your reality.
Develop loyalty programs
Loyalty programs are great for encouraging repeat purchases and, with that, increasing customer lifetime retention.
Remember that customers who buy from you repeatedly are more profitable than those who make only one purchase, in addition to it being cheaper to retain this consumer than to attract a new one.
But for the loyalty program to be truly interesting, it is important that it relates to your audience. It is no use offering items as gifts and benefits that are not viewed positively by your clientele, because this will make your loyalty program unused.
Also try to think of a program that is easy to use and has clear and well-defined rules.
Manage customer relationships correctly
The customer experience counts a lot when it comes to them continuing to buy from your company. So, focus on improving your customer service, developing a good support policy, and analyzing points that can be improved throughout the entire consumer experience and journey.
For this, do not be afraid to listen to feedback – this information helps improve your product or service, the service you provide, and other points that can totally influence your LTV.
Identify and focus on your valuable customers
LTV helps identify the most profitable type of customer for your business. By understanding the profile of this type of person, you can define more segmented marketing strategies, focused, precisely, on acquiring high-value customers who are more likely to buy from you repeatedly.
Use content marketing to your advantage
The customer experience is extremely important for a consumer to become loyal to your brand. And content marketing is an ally in this regard.
After all, by developing and offering rich and informative content to your customers, you can create a relationship with these people, in addition to helping them better understand your product or service and use it properly (as in the case of software and technologies, where LTV depends on how much the customer can extract benefits from the sold solution).
Implement customer success
Customer success is an area that goes beyond service – and requires attention to the smallest details, in order to ensure that the customer gets the best results from their purchase.
Let's assume your company sells an ERP. It is essential that the companies that bought your solution are able to get significant results from using the ERP. Customer success will, then, accompany this use, listen to customers' questions, and help them get the most out of the tool.
This increases buyer satisfaction, making them renew their subscription with your company. Something that would not happen if, in the first month, the customer could not use the software and did not have proper guidance support, for example.
Conclusion
In this content, you learned that LTV is a very important metric that shows how much profit each customer brings during the time of relationship with your company.
If you analyze this metric together with others, such as CAC, average ticket, and churn rate, you will be able to identify the best customers, evaluate how effective your acquisition and sales strategies have been, and think about more precise and segmented steps to acquire and retain high-value customers.
To achieve all these objectives, both LTV and the other metrics must be monitored periodically, helping you, as a manager, to have a more detailed and precise view of your business.
