what it is and how to calculate your company’s Lifetime Value – WAU
What is the value of a customer? At first glance, this question may seem impossible to answer. After all, no business survives without customers, and only those who are entrepreneurs know the effort required to get each one. However, digital tools have changed the way business is done, and one reason is the possibility […]
What is the value of a customer?
At first glance, this question may seem impossible to answer.
After all, no business survives without customers, and only those who are entrepreneurs know the effort required to get each one.
However, digital tools have changed the way business is done, and one reason is the possibility of measuring almost everything in a marketing and sales strategy.
Among the elements that you can (and should) know well is the lifetime value – which answers the question that opened this post.
In practice, this metric can teach you a lot about various aspects of the company and help you organize yourself better to ensure a healthy future for your venture.
Do you want to know more about lifetime value and how to use this indicator on a daily basis to make better decisions? So come on!
What is lifetime value?
The translation of the English term “lifetime value” or LVT is “lifetime value” and can be easily understood when we put it in the right context. This metric estimates the net profit of a customer’s life within the company.
A customer’s lifetime value is how much money he will give your business for the entire time he buys from you.
Let’s take an example to make it easier to understand:
Think that one of your customers made 4 purchases over 2 years, and then never bought anything again.
Each purchase had a different value:
- the first had a value of R $ 25.00;
- the 2nd, R $ 100.00;
- the third, R $ 120.00; and
- the last, R $ 80.00.
Thus, you could say that the lifetime value (or LTV) of that person was R $ 325.00, which is the sum total of the amounts spent by him during the period he was a client.
Of course, the idea of this indicator is not to make a separate account for each customer.
This would be time-consuming and inefficient.
The goal is to analyze all customers, in general, and find the average amount spent and length of stay.
It is from this that adjustments will be made, both to increase value and to make customers stay longer before leaving your product or service in search of something else.
Why is this indicator essential for the health of your business?
You don’t have to think hard to understand how LTV is essential to a company’s health.
Knowing precisely how much money, on average, customers spend and how long they use your product or service can help:
- set the maximum marketing budget so as not to spend too much on acquisition and lose money in the long run;
- know how much revenue you can expect for the months ahead, based on sales history and LTV;
- find specific flaws that cause customers to give up on the service too early; and
- find misused opportunities to improve acquisition and retention.
In other words, calculating and tracking lifetime value is critical to shedding light on some of the most important management and marketing decisions you need to make.
How to calculate lifetime value without complications?
You may have noticed, from the example above, that calculating the lifetime value of your customers is not complicated.
However, to make it easier, there is a basic formula so that no one gets it wrong when making this account.
Just follow the following model:
LTV = (average ticket × average purchases per customer each year) × average relationship time
Let’s put some real data to make it easier to see the account.
Let’s assume that the amount spent, on average, by your customers every month is R $ 400.00.
The amount is paid per month, so the average transaction per customer every year will be 12 (1 per month).
Finally, let’s say the average relationship time (from purchase to cancellation) is 3 years.
The formula, with these numbers, would leave the calculation like this:
LTV = 400 (average ticket) x 12 (number of purchases per year) x 3 (duration of the contract)
LTV = (R $ 400.00 × 12) × 3
LTV = R $ 4.8 thousand × 3
LTV = R $ 14.4 thousand
In this case, the lifetime value of its customers would be R $ 14.4 thousand.
That would be the total amount invested by a customer in your company.
If the length of stay is less than 1 year, just multiply the average ticket by the total number of purchases.
If the contract time here were 10 months, the account would be just:
LTV = R $ 400.00 × 10
LTV = R $ 4 thousand
Which indicators are important for lifetime value?
LTV is a powerful indicator, but, like any metric, it has to be analyzed in context.
This means comparing the collected data with other relevant metrics.
This comparison helps to complete the puzzle that shows the real and complete situation of your business, that is, it shows what is working well and what needs more attention to improve.
Here are some of the most important metrics to measure together with lifetime value:
The churn rate measures how many people cancel your product or service each month.
The higher this indicator, the worse your LTV will be.
Therefore, it is important to assess churn in isolation.
This will help you to see if the dropout rate is too high and find ways to increase customer satisfaction and retention.
Customer acquisition cost (CAC)
The acquisition cost is perhaps the most important metric to compare with LTV, as it indicates how much your marketing and sales team spends to close each sale.
If the value of your CAC (which is usually spent before the sale happens) is very close or even greater than its lifetime value (value that will be received over the years), the financial health of the business is in serious danger.
Therefore, the rule is always to keep CAC much lower than LTV.
The average ticket is also taken into account to determine your LTV.
Thus, evaluating it in isolation is of great help in finding opportunities to increase the value received from the customer base.
As this value goes up, the lifetime value also increases, which is very good for the entire business.
How to increase the LTV of your business?
The goal is always to make customers stay with you as long as possible and increase the amount invested by them over time.
How to complete this double mission?
One thing is right:
There are no shortcuts, just techniques and good practices that you need to follow.
The sooner you start using them, the faster you will see the return.
If you perform the 4 actions below, you will get on very well with LTV and with the other metrics we have listed above:
Invest in content marketing
Content marketing, when done well, has the power to attract many customers to your business, no matter what the size or market segment in which you operate.
There is a lot involved in a content strategy, like creating a blog and investing in SEO.
The most important thing, however, is to plan well, execute accurately and be patient.
Take customer loyalty seriously
Customer loyalty is a continuous effort, which must be part of the company’s culture.
If customers are not everyone’s priority, some part of the process will make neglect clear – and churn will increase.
Quality service throughout the commercial process and a real after-sales strategy make as much difference as product improvements or competitive prices.
Implement Customer Success
Customer Success goes beyond service, as it requires attention to the smallest details to ensure that the customer always gets the best results from what they have purchased.
Basically, the role of the Customer Success manager is to ensure that all the value promised in the sale is delivered, in addition to anticipating possible problems and avoiding them even before they happen.
Keep an eye on the digital transformation
The digital transformation has brought incredible advances and continues to spread to the most diverse levels of society.
Keep an eye on the ways that this phenomenon has already changed and will still change your market branch.
Be willing to take risks and innovate with technological solutions that will enrich the customer experience and generate more value without increasing costs for him.
Whoever does this today will reap the rewards ahead.
Since lifetime value is not just an effort for the present – but also for the future – this practice is more than valid.
Lifetime value is crucial to the health of any company, and it is not a difficult number to measure.
Do not forget to monitor this indicator constantly and compare the data with other metrics.
This will give you the broad vision you need to achieve better results.
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