Calculating Customer Lifetime Value

So what is ‘customer lifetime value’ (LTV) and why should you measure it?

Customer Lifetime Value is an extremely important metric that any size of business should be using to allow them to grow the business effectively. Why? Because in a nutshell it allows you to determine what you can spend to acquire a new customer and still remain profitable.

Imagine if you knew that every new customer cost you £100 to acquire but they were actually worth £200 to your business. You would keep spending that £100 over and over to grow the business.

Sounds straightfoward but many businesses don’t measure this or perhaps are not sure how to.

Firstly you need to determine your cost of acquiring a new customer. Now sadly this is where alot of systems fail, staggeringly many CRM systems, the very things that should be measuring this metric don’t! You need to track each channel you are marketing in and how many leads each channel generates. If you know your spend on a campaign and the number of customers it has produced then you have your starting point.

Now you need to calculate the total spend a customer makes over their ‘lifetime’. Now again this isn’t that straight-forward as how do you determine a customer that is dead from one that is live? Well you can use another metric called ‘latency’. Latency is the amount of time between each customer purchase.

Once you have your ‘average’ customer lifetime value and your current customer acquisition cost you can now determine if there are funds to enable you to increase your marketing spend. Many marketers use these metrics to actually lose money or break even on the initial sale to boost customer conversions as they know they can recover this cost on the ‘back-end’ by selling higher value items. This is also known as ‘moving the free line’.

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