Customer Lifetime Value: Three ways to estimate your LTV

This is part 3 of our series on Lifetime Value, previous segments are available in our archives.

I hope it’s clear why knowing your customer Lifetime Value (LTV) is important, and a potential competitive advantage. However, when you first launch a new product, service or business, you haven’t had customers for very long! How do you estimate your LTV in those early days?

That’s a good question! There are a number of techniques for estimating your LTV even when you are first getting started:

  • Build a model. When you decided to pursue your new product or service, you did research to make sure it could be a profitable business. Hidden in that model is a LTV estimation in the form of the number of customers you plan to retain and how much they will purchase. Extract that LTV from your model and start with that as an estimate.
  • Use Industry Benchmarks. While you might not know your customer LTV yet, other companies similar to yours have comparable LTVs that you can use. For example, RJ Metrics publishes an annual report that includes average LTVs for e-commerce services. Be sure to adjust benchmarks for your business by examining the assumptions!
  • Be Conservative. While you don’t know how much a user will be worth over their lifetime, you can segment customers by their initial purchases and in doing so estimate their future LTV based on similar customers. When doing so, be conservative when assigning a customer to a segment so that you will never over-estimate LTVs.

There is no replacement for having real data, so all of these only provide you with an estimate that you will adjust as you gather data of your own. Be sure to revisit your LTV estimate on a regular basis as even small changes might radically affect your customer acquisition strategy!

Quote of the Day: Our estimates vary with our moods; the time may be much longer than our hopes and much shorter than our fears.” – H. G. Wells