In this post, we will talk about the importance for businesses of taking LifeTime Value (LTV) into account, how it is becoming more important today and what additional metrics must take additional metrics into account.
What is the Term LifeTime Value (LTV)?
If you dedicate yourself to the world of marketing both online and offline, this term must ring a bell (and a lot). Currently, we find ourselves with much more competition when it comes to advertising on any channel, so acquiring a new client is more expensive on any platform, or it is more difficult for us to convince ourselves that our proposal is better.
Therefore, we tend to improve and increase the number of customers who already buy from us (when we talk about recurring consumer products).
In this way, of course, we highlight its basic definition so that it is clear to us, and we record it in our heads and quickly stay with: “customer lifetime value”.
It consists of two primary metrics: the current value of the customer and the potential value that a customer can have for a company. In this way, another KPI appears to take into account when working on this exercise: CLV, the profit margin that a customer contributes to the company throughout his life.
Our objective here is to build a solid relationship over time with a client since, today, it is more beneficial than attracting new clients.
How is it Calculated?
There are several valid calculation formulas, but so that we understand them and go little by little with these new concepts, we propose the simplest:
LTV= Average Spending x Acquisition Recurrence x Customer Life (number of years our customer has been).
Additionally, we add another concept linked to the LTV to have a complete vision and to be able to analyze when making decisions, the CAC (Customer Acquisition Cost), the result of the sum of the investments made in marketing and sales divided by the number of customers gained in a given period. Here is its formula:
CAC = (Marketing Investments + Sales Investments) ÷ Customers won
Eye! For the calculation of the CAC to be assertive, we must consider only the number of clients acquired from the actions carried out by marketing and sales and not the total number of new clients in the period.
Another Important Fact
The cost of acquiring a client (CAC) must be less than the lifetime value (LTV) since it would cost us less to attract a client than we obtain from him.
To finish, we highlight the importance of this KPI for any business since it is estimated that between 4% and 18%, while this percentage rises to 65-75% when it comes to a customer who has already bought.