LTV

Category: Marketing

LTV (Lifetime Value) or CLV (Customer Lifetime Value)

LTV/CLV represent the total projected profit that one customer will generate for your business over the entire period of your relationship.

Simply put, this is the answer to the question: "How much money will this customer bring us while they're with us?"

LTV is not just the sum of all their purchases, but specifically the profit from them.

Why is LTV so important?

Understanding LTV is critical because it directly influences key business decisions:

  1. Customer Acquisition Cost (CAC): The golden rule in marketing is that LTV must be higher than CAC. The higher the LTV:CAC ratio, the more profitable your business is. A good ratio is generally accepted to be at least 3:1.
  2. Marketing budgets: Knowing LTV tells you how much money you can spend to acquire a new customer without losing money. For example, if you know that one customer will bring you 3,000 EUR profit, you can afford to spend 500 EUR to attract them.
  3. Customer satisfaction and loyalty: LTV guides you toward customer retention strategies. Longer customer life = higher LTV. This motivates companies to invest in service, loyalty programs, and product improvement.
  4. Customer segmentation: Not all customers are the same. By calculating LTV for different segments, you can identify your most valuable customers and focus your marketing efforts on them.

How is LTV calculated?

There are both simple and very complex calculation models. Here's one of the most common and easy to understand:

Basic formula:

LTV = (Average purchase value) * (Number of purchases per period) * (Average customer lifespan)

Example for a local business:

Let's say you have a fitness gym.

Average monthly fee (AVG): 50 EUR.

Average membership period (Lifespan): 24 months (2 years)

LTV = 50 EUR/month * 24 months = 1,200 EUR.

This is the total revenue. To get the profit, we need to subtract the costs (for example: gym maintenance, salaries, taxes). If the profit margin is 30%, then the LTV profit is 1,200 EUR * 0.30 = 360 EUR.

This means that on average, each customer brings 360 EUR net profit to the fitness gym.

Key components of LTV

To break it down in more detail, LTV is influenced by three main factors:

  • Average Order Value (AOV): How much the customer spends on average per transaction.
  • Purchase Frequency: How often the customer shops from you (per month, per year).
  • Customer Lifespan: How long (in months or years) the customer remains loyal to your brand before stopping shopping.

How to increase LTV?

Strategies for increasing LTV focus on increasing one or more of the above components:

  • Increase order value: Cross-sales and up-sales (e.g., "Would you like to add this?"), offering premium packages.
  • Increase purchase frequency: Loyalty programs, retargeting campaigns, personalized offers, regular newsletters.
  • Extend customer lifespan: Exceptional customer service, reward programs, engaging content, community groups, continuous product/service improvement.

In conclusion:

LTV is not just a number. It's a way of thinking that guides the business to focus on the long-term value of customers, rather than one-time sales. Investing in customer relationships always brings higher returns.