Calculating the LTV , or Life Value of a Customer, helps to predict the revenue that a company can anticipate from a single customer or account and to measure the return on investment of marketing efforts.
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It is proven that it is much more expensive to acquire a new client than to keep an existing one, so, to boost the profitability of your business, the key is to extend the life of the client, or the time during which they will continue to buy from you, with the help of a retention strategy.
This is the first step in becoming a consumer-centric organization and paying attention to these types of metrics.
What is the Lifetime Value ?
Also called Customer Value over Time, LTV is considered one of the most important metrics in determining the profitability of your marketing investment. The other is the Cost of Acquisition of a Client, or CPA .
In theoretical terms, the customer's lifetime value is defined as the net present value of the profits that an average customer can generate over a given period.
Based on a formula, it is possible to determine what the long-term value of a customer will be by projecting their future purchases.
Hence the importance of building their loyalty and extending their relationship with the company as much as possible, since the longer it is and more purchases, the cheaper it will be to acquire and retain it, and the more profitable it will be for the business.
How to calculate the lifetime value of my clients?
The key to the calculation is to consider the client as an asset of the company and apply a financial analysis such as that used to evaluate investments.
What is done through established formulas is to update the cash flow expected from an investment project to current value, in this case the retention of the client, discounting the cost of capital in the future.
In general terms, the basic formula to measure LTV comprises:
Calculate the value of an average purchase, dividing the total revenue of the company during 12 months by the number of purchases made in the same period.
Estimate the average purchase frequency rate , dividing the total purchases in the period by the number of unique customers who made purchases.
Determine the value of the customer, multiplying the value of an average purchase by one and subtracting the average purchase frequency rate from the result.