LTV
LTV (Life-Time Value; sometimes the abbreviation CLTV is used - Customer Life-Time Value) - this is the profit that can be received from a client during his interaction with your business.
This metric allows you to ensure that the cost of attracting a client and its subsequent retention does not exceed the income from it. In other words, by measuring LTV, you can evaluate the profitability of your business, as well as make a long-term forecast and estimate how much you need to spend on retaining existing customers.
It has long been known that retaining existing customers is much cheaper than attracting new ones. And thanks to the calculation of LTV, you have the opportunity to evaluate the value of each of your existing customers and decide whether it is worth spending additional funds to retain them. Thanks to this, it will be possible to modify the strategy of working with existing customers, focusing on the ones that bring the greatest profit.
Today, there are several ways to evaluate LTV. For this, formulas of varying degrees of complexity are used. The simplest one looks like this:
Naturally, such calculations make it possible to estimate only the most general value, and for this reason, more complex approaches are used to calculate LTV. For example, you can use the formula:
In this case, it becomes possible to make a forecast for a certain period. For example, you have a client who, on average, makes purchases for $50 with a regularity of 2 times a month. It is easy to calculate that the LTV indicator for six months will be: 50x2x6=600. Naturally, the forecast in this case turns out to be very conditional, since everything can change in the expected six months.
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But usually, when calculating LTV, much more complex formulas are used to get more accurate values. If desired, it is not difficult to find even special online calculators on the Web that will allow you to carry out calculations by simply substituting the available values in the required fields.
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