What is Lifetime Value and why it should matter to marketers
Understanding ways of increasing profitability within a business whilst also caring about your customer needs can be daunting for marketers – especially in times of economic hardship and ever-increasing demands on marketing teams from senior leaderships.
However, marketers seem to be missing a trick when not using Lifetime Value as part of their planning, budgeting and KPI setting.
But what really is it and how can it help us?
What is Lifetime Value?
Lifetime Value (LTV) is a crucial metric used in marketing to assess the value of a customer over the entire duration of their relationship with a business. It quantifies the net profit a company can expect to earn from a customer throughout their entire lifecycle as a patron.
Understanding and maximising LTV is essential for effective marketing strategies and sustainable business growth and can be a key factor when considering why you should put time and effort into maximising your customer relationships.
Lifetime Value (LTV) can also be known as Customer Lifetime Value (CLV).
The basic formula for calculating LTV is as follows:
- Average Purchase Value: This refers to the average amount of money a customer spends on each transaction or purchase.
- Number of Repeat Transactions: It represents the average number of times a customer makes purchases or engages with the business over their entire relationship with the company.
- Average Customer Lifespan: This is the average length of time a customer continues to do business with the company.
Choosing your date range is important – to get the best results, you want to be looking at the annual average.
In addition, the marketing technology you have in place is incredibly important in calculating LTV – you need to be able to base your calculations on accurate data. Let us know if you need some support in reviewing your platforms.
What are the benefits of using Lifetime Value in marketing?
- Understanding Customer Retention: To increase LTV, businesses need to focus on customer retention. By retaining customers and encouraging repeat transactions, the number of repeat transactions in the LTV formula can be increased, boosting the overall lifetime value of each customer.
- Targeting High-LTV Customers: Identifying customers with high LTV potential allows businesses to invest more resources in acquiring and retaining them. These high-value customers can become loyal brand advocates and also contribute to positive word-of-mouth marketing.
- Personalisation and Customer Experience: Providing personalised experiences and exceptional customer service can foster loyalty and drive repeat conversions, ultimately increasing LTV.
- Customer Segmentation: Segmenting customers based on their behaviours, preferences, and engagement patterns can help shape marketing efforts to suit different customer segments, with the aim to improve profitability of each customer group
- Long-Term Strategies: Instead of solely focusing on short-term acquisition, businesses should implement long-term strategies that focus on building lasting customer relationships.
Why aren’t marketers using LTV?
In simple terms, organisations so often fall into the trap of thinking it’s all about continually finding new audiences to market to, being reactive to business demands which often ignore long term marketing strategies, and, sadly, often markers haven’t been taught the importance.
Why should marketers, and key stakeholders, care about LTV?
LTV can support a marketing teams need to build a retention strategy and invest in it. LTV can support your long-term goals as opposed to only addressing short term needs. By nurturing your customers and getting to know what they want and when they want it, using LTV as a metric will drive higher profits, campaigns will cost less money and your customer satisfaction and retention rates will increase.
The key takeaway to this is that customer loyalty and retention are key components of increasing LTV over time.
Lifetime Value is a valuable metric in marketing that is highly underused in modern marketing teams. It enables businesses to quantify the long-term value of a customer and should be used to inform decisions related to customer acquisition, retention, and overall marketing strategies.
By understanding and optimizing LTV, businesses can improve profitability, maintain sustainable growth, create a loyal customer base and increase overall brand trust by putting value on their customers.