Ever wondered how much your customers are worth to you? Well, Lifetime Value is a metric used to calculate the value of an individual customer over their entire lifetime. Lifetime Value is necessary considering it helps you understand how much you should spend on acquiring new customers, as well as which products or services would be most profitable for your business.
What is Lifetime Value? (LTV)
Lifetime value is the metric that indicates the income generated from a customer during the entire course of their engagement with a business. It is the total of both the cost and revenue generated by an individual over their lifetime as a customer.
How to Calculate LTV?
It is calculated by multiplying the average customer's lifetime by the income generated.
The formula of LTV is:
Lifetime Value = Lifetime x Average Income per transaction.
For Example:
if the average customer stays with us for three months and spends $100 per transaction, then LTV is calculated as follows:
Lifetime Value = Lifetime x Average Income per Transaction
i.e Three Months x $ 100= 300.
Why LTV?
- LTV is a key metric for any business because it measures how much money you can make on average per customer. LTV helps us identify the most profitable customers.
- LTV is important to calculate because it can help us make better decisions. For instance, if you're trying to decide how much of your marketing budget should be allocated for customer acquisition and retention efforts, LTV will allow you to calculate the ROI in real-time.
- You'll know whether or not a given campaign is generating enough Lifetime Value per dollar spent on advertising because this metric tells us about the lifetime value of each new lead versus what we've invested so far.
- With LTV data, marketers can adjust their campaigns as needed until they find something that generates high volumes of leads and has an optimal return on investment (ROI).
In other words: "Lifetime Value" helps define our marketing strategy.
7 Tips to increase your LTV
Here are 7 tips to help you increase the LTV for your business:
1) Know your Customer Deeply
If you want to increase Lifetime Value, you must know what the customer needs and provide the right product.
For example: For example, a Gym software may have better LTV if they targeted chains with > 10+ branches.
Chains with 10+ branches (LTV) = $2500
Single Store Gym (LTV) = $500
Based on this deep understanding of customers, your sales team can focus on the right set of customers
2) Customer Loyalty Programmes
Offer discounts or incentives for customers to make repeat purchases.
3) Pay attention to Customer Feedback
They'll be the ones who will tell you what needs improvement and how they want it improved
4) Review your KPI's regularly
Use Lifetime Value as one of them in order to know where improvements should be made, so that when a campaign fails, at least we've learned something from it and can take steps towards improving our marketing strategy.
5) Increase Lifetime Value with Marketing Automation
Take advantage of the many tools and tactics available in your CRM software package, such as lead scoring for prioritizing ideal prospects, email campaigns for encouraging repeat purchase, automated customer follow-up after an order has been placed, or abandoned online shopping carts.
6) Measure Retention over Time
This will help you find out what marketing strategies are working best and taking care of customers better.
7) Talk to Actual Customers
Actively engage them by asking about their thoughts on products/services they've purchased from you before so that when it's time to design future offers and promotions.
After reading this blog post, you'll know what Lifetime Value is and why it's necessary to calculate.
You have also learnt various tactics to increase the LTV of your customers with a few simple calculations!
In today’s hyper-competitive marketplace, calculating Lifetime Value (LTV) can be one of the most important parts of maintaining or growing your company.
By understanding how customers behave over time from purchase to lifetime loyalty, companies can increase their conversion rates across all mediums by identifying consumers who fit into specific marketing segments and finding ways that they resonate best.
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