LTV helps a marketer find out how much money customers bring to a business, plan expenses on advertising campaigns more accurately, and evaluate their payback. We will tell you how to calculate the LTV indicator and what to do to improve it.
What is LTV and why is it important to calculate it?
What data is needed to calculate LTV
LTV calculation formulas
How to increase LTV
Expert advice
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What is LTV and why is it important to calculate it?
Table of Contents
LTV (from English lifetime value) is a metric that helps you understand whether marketing costs pay off and evaluate the effectiveness of a business model. For example, an Internet marketer sets up advertising campaigns, and it is important for him to understand which ones work well and which ones do not.
Let’s say a specialist spent 100,000 â‚˝ on advertising in a month, and the company’s revenue for the same period was 50,000 â‚˝. It seems that everything is bad and the business is unprofitable, but customers can come back and buy more. The LTV indicator helps to see how much money customers bring in over a certain period of time.
It happens that attracting a customer costs 1000 â‚˝, and in the first month he brings only 100 â‚˝, that is, he covers only 10% of the costs. Then the same client continues to buy and in a year brings in a total of 2000 â‚˝. This means that the costs of attracting one customer have paid off and brought profit.
Usually, LTV is an average indicator. Depending on the situation, we can talk about the LTV of a specific user or a group of users. For example, housewife Maria brought the company 30,000 â‚˝ during the entire time she used the fitness app, and a group of users who came to this service from VKontakte advertising for Moscow bring 1 million â‚˝ per year.
What to calculate depends on the task the marketer wants to solve. If you need to plan a promotion and send special offers to clients, it is important to know the LTV of each user to identify the more “valuable”. If you need to manage an advertising campaign and turn on/off banners, you need to evaluate the LTV of the user group that comes from these banners.
Why Calculate LTV
LTV in marketing helps business owners and marketers determine how effectively they manage the company’s resources and, if necessary, adjust the budget and expenses. For example, to attract one client, a marketer spends 1,000 â‚˝, and the client brings in a profit of 1 million â‚˝. This profit can be taken from the company’s turnover, or it can be reinvested and increased investments in advertising to attract even more buyers.
Students of the Internet Marketer course learn to calculate LTV and other metrics using real projects in order to evaluate the effectiveness of advertising and help the company earn more.
What data is needed to calculate LTV
To calculate LTV, a marketer needs at least the following metrics:
â—Ź Â The average revenue
a company receives from a customer over a given period, such as a week, month, or year.
â—Ź Â Cost of attracting a new customer
, or CAC (from English customer acquisition cost) – costs of advertising, marketing and other expenses that help attract buyers.
â—Ź Â The average time
a user remains a customer of the company, in weeks, months or years.
LTV calculation formulas
There are different ways to calculate LTV. The choice of method depends on the business area, the data that the marketer has, and the goals of the analysis. For example, to calculate the LTV of one client for a certain period, it is enough to simply add up all of his payments for this time. For example, a person buys coffee in an online store every month and spends from 2,000 to 5,000 â‚˝ on each order. Let’s calculate his LTV for the year using the formula:
LTV = 2000 + 3500 + 4700 + … + 2900 + 5000 = 36,200 ₽
In areas where the exact “lifetime” of a client in a company is known, another LTV formula can be used. For example, clients of an online school of foreign languages ​​study for an average of 10 months. The company’s profit from each student per month is 3,000 â‚˝. To find out the LTV, you need to multiply the profit by the period of use of the product:
LTV = 3000 â‚˝ x 10 months = 30,000 â‚˝
You can calculate the LTV of a cohort, i.e. a group of people with similar characteristics who performed an action on a certain day or hour. For example, 100 people registered on the site in a day and made orders for 15,000 â‚˝. We find out the LTV of this cohort using the formula:
LTV = 15,000 rubles / 100 = 150 â‚˝
This method helps to evaluate which advertising campaigns worked more effectively, or to identify periods of decline and buyer activity.
Read Also:How to Manage Marketing as an Entrepreneur
How to increase LTV
The LTV indicator is also the total revenue from a client, that is, “increasing LTV” means “earning more”. This can be done in several ways:
â—Ź Â Increase the average check
When customers buy more products at one time, their LTV increases. To do this, they are offered additional products or services.
â—Ź Â Increase customer loyalty
If customers understand that the company takes into account their wishes and requests, they can become regular customers. Customer loyalty can be increased in tangible or intangible ways.
Material methods are special programs, such as cashbacks, cumulative discounts, bonuses. Intangible methods are improving the quality of service, working with negative customer reviews .
â—Ź Â Increase the frequency of purchases
The more purchases a customer makes over a certain period, the higher their LTV, and therefore the company’s profit. You can increase the frequency of purchases using mailings with special offers or personal discounts, gamification and other techniques.
Increasing LTV and business profit is the task of the entire company. Each department or specialist at their level is responsible for ensuring that the product generates income. For example, sales managers communicate politely with customers and do not impose goods or services. Customer support specialists quickly respond to user requests. Cleaning staff maintain cleanliness in the sales area so that customers enjoy being there and want to come back.
