Lifetime value (LTV) is a measure of the average revenue that a customer will generate over the entire duration of their relationship. It is a key metric in subscription-based models. MRR (monthly recurring revenue) is a good metric for evaluating the performance of an ecommerce website.
LTV can help determine how much of an investment it makes sense to make on marketing efforts, how many resources should be allocated to sales, and calculate profitability for new subscription models.
How LTV Is Calculated
Lifetime Value is typically measured by the average amount a customer will pay you during their subscription period. In the case of a subscription model, a simple way to calculate lifetime value (LTV) is to take the average monthly amount that each customer would be expected to spend and multiply it by your churn rate (the rate at which you lose customers each month).
For example, if you charge $250 per month and your churn rate is 5% then your LTV for a new customer is (250/0.05) or $5,000.
For non subscription based companies it’s the total amount of money you think you’ll gain from a customer. This can be down by first determining your average order value (AOV) which is the total revenue you expect from a customer who orders from you at least once. You then multiply the Average Order Value by the number of expected purchases and time of engagement. Therefore, the LTV of a customer can grow or shrink over time based on your offerings and ability to grow the account.
It's important to keep in mind that different types of customers have different LTVs. You can calculate LTVs for different customers based on the segment of pricing they fall into.
How LTV Is Used
Lifetime value is an important variable in revenue forecasting, which is the average revenue generated per month by a customer. LTV can also be used to determine the marketing budget of a company. It provides insight into the value that customers will contribute over their lifetime, and can be used to determine marketing budgets.
Another important use of LTV is determining the value assigned to current customers. You can allocate more resources and effort toward acquiring and maintaining certain customers, since those customers are more valuable.
Customers who have a high lifetime value (LTV) should receive more resources if they are nearing the end of their lifecycle. This is especially true for customers who are close to renewals, since they have already invested a lot in the relationship and may be more willing to renew.
How To Increase Lifetime Value
You should increase the LTV of new customers by reducing churn. To do this, you should have a retention strategy tailored towards different LTV segments. For companies that are subscription-based, one effective way of increasing LTV is to create add-ons that can be up sold to subscribers.
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