Customer Lifetime Value

The lifetime of a customer is a business metric that every business owner should know. Have you heard the term, “it is cheaper to retain an existing customer than acquire a new one”? Well, it is true. Studies have found that it could cost nearly five times as much to acquire a new customer rather than to keep an existing one. However, the customer lifetime value delves so much deeper than that. Read on.

The customer lifetime value is the overall net profit that is contributed to the entire future relationship with a customer. The LTV, for short, is a metric which identifies what the total worth of a customer is to your business over the duration that they maintain a relationship with you. The customer LTV does not just prove that it may be “cheaper to keep an existing customer”, but that it is more profitable to your business to keep the right customer.

To calculate the LTV, use the following equation:

Average Revenue per Customer / Revenue or Customer Churn = Customer LTV

 
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So, how often should you measure the customer LTV and how do you make it work for your business? The customer lifetime value can be measured monthly or quarterly, whichever frequency is best for your business. However, it is important to be consistent.

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If your business is one with higher order frequency, is a low-cost item, or has a slightly volatile contract period with high churn rates, monthly tracking may be best. On the other hand, if your business with lower order frequency, has a longer-term contract period, or is a higher cost item meaning that less people may purchase from you frequently and you typically receive more qualified buyers at the onset, quarterly tracking may better benefit your business.

At the end of the day, the LTV allows a business to use data to identify how to maximize the overall value of their existing relationships with customers, helps inform how to improve consumer segmentation, and helps identify revenue goals from specific audience groups. The lower the LTV, anticipate more customer churn and less retention. Alternatively, the higher the LTV, the greater the brand loyalty and less churn.  

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Chanel Currybusiness, small business, business strategy, customer, customer lifetime value, business metric, churn, retention, marketing strategy, ARPU