The goal of any business is profit. It is important not only that he brings a lot of money, it is necessary to correctly distribute them. For this reason, a systematic performance analysis is an integral part of a successful business. One of the main indexes used by marketers is LTV.
What is LTV?
LTV is the abbreviation translated as "customer life cycle." This indicator shows how much each buyer brings to the company for the entire time of cooperation with her.
Usually, two methods of calculating this indicator are used.
- Historical, taking into account the total value of income that a particular buyer brought to the company.
- Predictive is necessary to build a more complex behavioral model of the buyer. It takes into account which goods (services) are more interesting to the client, in what price range are his preferences, what is the frequency of purchases. Based on statistical data, a forecast is formed for the future, which allows predicting its acquisitions.
Importance of LTV
For business performance regular customers are of great importance. The cost of retaining them is lower than attracting new ones. Therefore, the longer the customer’s life cycle, the more profitable the business.
The calculation of this indicator allows you to identify which methods of attracting customers work most effectively. It allows you to abandon the ineffective. And it also makes it possible to draw up a “portrait of the buyer”, that is, what is the age, gender, social status of the main customers. It is important to strive to increase LTV compared to the cost of attracting customers.
Separately, it is necessary to analyze the customers who generate the greatest income. This allows you to determine which group of consumers they represent. Marketing analysis will help determine the best advertising channels and the correct flow of information. In addition, it will allow you to review the range of products or services, getting rid of those that are in minimum demand and adding those that are interesting to regular customers. This will extend the term of their loyalty.
Building a business that focuses on lifetime value will provide you with a serious competitive advantage.
Simple calculation formula
There are several methods for calculating LTV. The specific choice depends on the specifics of the business. To calculate using the simplest method of calculation, little information is needed. Simplicity is its advantage. The disadvantage is the receipt of only basic information. In order to calculate the LTV index, you need to know how much income a particular client has brought to the company for the entire time of cooperation. In addition, you need to know how much the company has spent to ensure that this customer maintains his loyalty.
With these data, calculating LTV is not difficult. In this case, it equals the difference between income and expense.
Basic calculation formula
It is based on averages. Since the coefficient of error in applying this formula is large enough, it is recommended to use it segmented. That is, it can be used when conducting a marketing analysis of various products.
In this case, LTV is a derivative of three indicators: the average sales value, the average number of sales per month and the average number of months of maintaining customer loyalty.
Outflow LTV
This method of calculating the indicator is used in the business associated with the sale of software products.
In order to calculate the coefficient of outflow of customers, it is necessary to divide the total number of customers who left in a month by the number of customers who paid the last month, and multiply by 100.
After calculating the outflow coefficient, you can calculate LTV taking it into account.
For this, the indicator of the average monthly income from the buyer must be divided by the already known outflow coefficient.
If the outflow coefficient is 5%, then this means that each buyer maintains his loyalty for 20 months. He then ceases to be a customer of the company. If the average monthly income from one buyer is 100 rubles, then the average income from each client will be 2000 rubles. (100 rubles. X 20 months.).
Having data on the average number of customers ceasing to be them, and the size of the average check, you can calculate the index of the average value of the client’s life cycle for a particular business.
If the amount spent on attracting a client equals or exceeds the value that it brings, then such a business cannot be called successful. It is necessary to make changes due to which the cost of attracting a buyer should decrease, and the value of the life cycle will increase. Thus, it is necessary to think about maintaining the loyalty of the client of the company for the longest possible time.
LTV and email newsletter
Emailing is a great way to increase your LTV. However, simple advertising information will not be accepted by users, and most likely, such a letter will be deleted. Therefore, you should use some tricks. For example, the most valuable customers with a high level of LTV can be sent a promotional code that will allow you to get a good discount on your next purchase. Those who spend less money can be given a more modest discount.
Newsletter should be regulated depending on the customer loyalty period. At first, he should be more often acquainted with new products and promotions. Those who remain faithful for more than a year should send letters less frequently and with the most valuable information for this category of buyers.
You must offer to purchase related products and accessories. A selection of recommended products can be sent by email after the customer has purchased something.
Companies that sell programs, access to films, books and music, increasingly offer to use a subscription, which can be purchased for the period chosen by the consumer. Subscription service allows you to improve LTV.
Retaining a customer is always easier and cheaper than attracting a new one. Therefore, it is so important to monitor its life cycle.