LTV Marketing

LTV in Marketing: What is it and how to calculate it?

All about LTV in Marketing: find out how to calculate and improve it in just a few minutes! Follow this KPI with our practical tips.

Lifetime Value or Customer Lifetime Value (LTV in Marketing) isn’t just digital marketing jargon. It’s a key indicator, which can be especially insightful in sectors such as e-commerce.

Lifetime Value (LTV) is an essential indicator for evaluating and managing the performance of a customer base. This indicator is also known as “Customer Lifetime Value” (CLV). LTV estimates the average revenue a customer generates for a company over the entire duration of the relationship.

Understanding and optimizing LTV can help you improve the overall performance of your marketing actions, as well as the way you spend your advertising resources. But what exactly is LTV, and what does it consist of? How do you calculate Lifetime Value? And why should it be considered important to your marketing strategy? Let’s take a closer look.

What is LTV in Marketing?

Definition of LTV – Lifetime Value

Lifetime Value (LTV) measures the total value a customer brings to a company throughout their relationship. Thanks to this indicator, you can find out how much a customer brings you on average, and how much it will cost you to lose that customer. More precisely, it’s about understanding how much your customers are worth to your company financially over the long term.

In the case of LTV Marketing, there are two measures to consider:

  • Temporal measure: the duration of the relationship between a company and a customer. In other words, you take into account the entire period when a person is considered a customer of your company.
  • Financial measure: The customer’s financial contribution to a company through purchases of their products or services.

Key components of LTV

To decipher LTV, you need to look at several key variables.

First, purchase frequency: how often does a customer buy from you? This is a direct indicator of loyalty and satisfaction.

Next, average basket: what is the average amount spent per transaction?

Last but not least, the customer’s lifetime with your brand. This can be enhanced by excellent customer service and products that are constantly aligned with market needs.

These elements, when combined, give you a clear picture of the long-term value of your customer relationships. But calculating these figures is only the beginning. The real challenge is to use this information to fine-tune your marketing and advertising strategies. By aligning your advertising efforts with LTV, you’re not just selling. In fact, you’re also building profitable, lasting relationships.

How to calculate LTV?

Formulas for calculating LTV in Marketing

The formula for calculating LTV is relatively simple. The most commonly used method is based on sales:

  • LTV (Lifetime Value) = Purchase frequency x Average basket x Customer lifetime
How to calculate LTV?

In other words, multiply the average purchase frequency by the average basket and by the average duration of the customer relationship. Here’s how we break down each component:

  • Purchase frequency: The frequency with which your customers buy your products or services.
  • Average basket: The average amount ordered by your customers.
  • Customer lifetime: The length of time your customers continue to order. This can be expressed as the number of months or years the customer will continue to buy from you.

But you can also use a second method to calculate Lifetime Value based on another key element. This is the margin-based method:

  • LTV (Lifetime Value) = Purchase frequency x Average margin x Customer lifetime
Calculate LTV in Marketing

In this case, the average margin corresponds to the net profit on each sale, after deduction of the variable costs associated with the product or service.

Example of LTV Marketing calculation

Let’s take a concrete example… Let’s say you have a software product and you use a subscription model to market it.

The average subscription for your software is €15/month. What’s more, you’ll notice that your customers remain subscribers for an average of 2 years. So, that’s the average lifespan of a customer.

First of all, the average basket will be equal to 15 x 12 = 180€. This figure corresponds to an annual subscription cost.

The LTV for your company will be calculated using this data:

  • LTV = 15 x 12 x 2 = €360

In our case, the LTV of a customer is 360 euros. This calculation helps you identify the value generated by each customer. And it allows you to better allocate your marketing resources.

Why is LTV important for a company?

Customer Lifetime Value (LTV) is a vital indicator of a company’s long-term health and prosperity. Understanding the importance of LTV can transform the way you plan future strategies and engage your customers. This indicator is important for several reasons.

Resource prioritization

LTV helps companies identify their most valuable customers, those who bring in the most revenue over the duration of their relationship with the company. This recognition enables companies to prioritize their resources. As a result, they can focus more on retaining these high-value customers and maximizing their satisfaction.

This means investing in quality customer support services, effective loyalty programs, and personalized offers. More precisely, it means investing in elements that respond specifically to their needs and preferences.

Optimizing marketing campaigns

Understanding LTV also enables marketers to target their marketing campaigns more effectively. With insights into which customers generate the most revenue, campaigns can be adjusted to attract similar segments.

Good targeting will thus improve the overall effectiveness of marketing efforts and reduce wasted budget on less profitable segments. This not only helps reduce acquisition costs, but also increases the ROI of advertising campaigns.

More accurate financial forecasts

LTV provides essential data for more accurate financial forecasting. By knowing the long-term value of customers, companies can better forecast future cash flows and make more informed financial decisions.

This is particularly crucial for fast-growing companies. In their situation, accurate financial projections are essential for attracting investment and managing expenditure.

Product and service development

LTV also influences the development of products and services. With LTV, companies better understand the needs and behaviors of their most influential customers. With this understanding, brands can innovate and develop offers that directly meet these expectations.

This can lead to a virtuous cycle of product improvement, increased customer satisfaction and, consequently, higher LTV.

Building lasting relationships

Finally, LTV is central to building lasting relationships. Companies that focus on increasing LTV are often those that value long-term relationships with their customers.

By adopting a customer-centric approach, these companies aren’t just trying to sell a product or service. They try to engage the customer in a mutually beneficial relationship that extends far beyond the initial purchase.

How to improve LTV in Marketing?

Once you have a clear idea of your current LTV, the next step is to look for ways to improve it. Increasing your customers’ LTV isn’t just about encouraging them to spend more with each transaction. It’s also about strengthening their loyalty and extending the duration of their relationship with your brand.

Improving customer satisfaction

Customer satisfaction is at the heart of loyalty. Ensuring a positive customer experience at every touchpoint can significantly increase the likelihood of repeat purchases.

This includes everything from product or service quality to customer service interaction. Regular surveys to gather feedback and proactive adjustments to services based on this data can turn an occasional buyer into a loyal customer.

Personalized interactions

Customers appreciate personalized interactions that reflect an understanding of their individual needs and preferences. Use available data to personalize communications with your customers. You can do this in different ways: email marketing, product recommendations, or customer service support.

Personalizing exchanges can boost engagement and increase repeat purchases. Technologies such as artificial intelligence play a crucial role here, enabling companies to target customers more precisely and with more relevant messages.

Loyalty programs

Loyalty programs that reward customers for repeat purchases are also a great way to boost LTV. These programs not only encourage repeat purchases, but can also turn customers into brand ambassadors to friends and family.

Make sure the rewards offered are attractive and relevant to your target audience to maximize their effectiveness.

Offer optimization

Adapting offerings to changing markets and customer preferences can also play a role in increasing LTV.

This can include introducing new products or services that complement existing purchases, or adjusting prices to maximize perceived value and profitability. A well thought-out offer strategy can not only attract new customers, but also increase the frequency and volume of purchases by existing customers.

To optimize your offer, you need to constantly monitor market trends and, above all, the needs of your customers. Your target market’s problems can evolve very quickly, and unnoticed. That’s why it’s important to keep in touch with them on a regular basis in order to respond to their requests.

Ongoing engagement

Finally, ongoing engagement with customers through various channels can help keep your brand at the forefront of their minds.

Using newsletters, blogs, and social media platforms to provide useful and engaging content can encourage customers to stay connected and engaged with your brand. Engagement doesn’t always have to be promotional. Provide useful and entertaining information to build loyalty and increase lifetime value.

Increase average basket

Offer cross-selling and up-selling. For example, if you sell shoes, offer socks or shoe care products as additional items at the time of purchase.

Personalized recommendations based on the customer’s preferences and previous purchases can also effectively increase the average basket.

Conclusion

LTV stands out among many KPIs. It is a performance indicator that emphasizes long-term value creation rather than focusing solely on short-term gains. By implementing the strategies discussed, you can improve your LTV. At the same time, you can strengthen and accelerate the growth of your business. Adopting an LTV-focused approach will help you build stronger, more profitable relationships with your customers, ensuring sustainable, profitable growth.

Vincent Chevalier Levy

Vincent Chevalier Levy

After managing the largest marketing analytics & growth teams from the Silicon Valley (Electronic Arts & Udemy), Vincent decided to create Impulse Analytics in order to accelerate the growth of the accounts he manages. Vincent's focus on media, content & data helped him generate more than +50 million euros of revenue, +70 clients supported, 25 countries and counting ..
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