Mastering your Customer Lifetime Value
One of the most critical metrics you can track for your business is the Lifetime Value (LTV) of your customers. This is the total amount of revenue you can expect to generate from a typical customer over the entire length of their engagement with your business.
LTV is a critical metric to track, since it informs how much you can afford to spend to acquire new customers (customer acquisition cost). If your LTV is $50 and it costs you $75 to acquire each new customer, then you are losing $25 with every customer! On the other hand, if your LTV is $50 and it costs you $5 to acquire each new customer, then you are getting a 10x return on that customer acquisition spend (and you have the flexibility to spend a lot more).
In modern marketing, companies who have a better measurement of LTV have a competitive advantage. For example, if you are sure that your LTV is $50, then you can spend up to $49.99 to acquire each new customer and still turn a (small) profit. If your competition isn’t really sure about their LTV but they think it is $50, they likely won’t be willing to risk spending $49.99 since they might be wrong and lose money. This means you can spend more to acquire customers even though your business might be identical!
LTV is a metric common to all businesses, but it is defined differently depending on your business model. Here are some examples:
- For subscription businesses: Your LTV is the subscription price times the average number of months a subscriber is active.
- For retail or e-commerce businesses: Your LTV is the total amount a given customer has ever spent in your store or on your website.
- For advertising: Your LTV is the total number of impressions a user views times your typical revenue per impression (typically measured in revenue per thousands of impressions).
There are many challenges in computing and tracking your LTV, some of which we will cover this week:
- Part 2: LTV requires you to know how long a user is active, but how do you really know when a customer is lost? Calculating LTV.
- Part 3: How do you calculate LTV for a new product or business, since you don’t have much data yet? Estimating LTV.
- Part 4: Examples, please? LTV metrics for different types of businesses.
- Part 5: How do I account for the fact that my LTV changes over time? Changing LTVs.
By the end of the week, my hope is that you understand your LTV so well that you can wield it as a competitive weapon!
Quote of the Day: “Life is what happens to you while you’re busy making other plans.” – John Lennon, in “Beautiful Boy (Darling Boy)”