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August 21, 2019

A Very Simplified Way on How to Calculate Customer Lifetime Value (LTV)

Customer Lifetime Value (LTV) has been said to be one of the most important marketing metrics for your business. In fact, you’ll find hundreds of articles, eBooks, and guides to teach you why and how to use this important figure.

But plain and simple… this metric can be confusing when first learning about it.

If you’re reading this now, then chances are that you’re still confused with LTV and you need a simple guide to give you the exact details of what it is and an even easier guide on how to calculate LTV for your business.

So let’s break it out for you. This article will give you a simple overview of what LTV is, how it can help in your business, and a simple printable PDF calculation formula sheet for you to get an accurate LTV number for your business.

What is Customer Lifetime Value?

According to HubSpot, Customer Lifetime Value is defined as…

The metric that indicates the total revenue a business can reasonably expect from a single customer account.

To add to this definition, LTV is the total revenue a business can reasonably expect over the lifespan of a single customer account. It’s the revenue you can expect to receive from one customer over the course of the time they do business with you.

To give some context for better understanding, let’s take Disney as an example. CRM Magazine states that Dinseyland has a Customer Lifetime Value of $62,000.

That means that on average, a single customer will pay roughly $62,000 over the course of their lifetime on Disneyland tickets, merchandise, and other transactions.

A number like that makes you wonder how you can maximize on your personal brand and your products, doesn’t it?

How does Customer Lifetime Value help my business?

If a company has several different products, but they aren’t sure which one is the most effective and/or favored by customers, what can they do? Sure, they might have sales numbers to give them insight, but what if those products are priced differently? How do you accurately tell which product is doing the best, especially with both new and repeat customers?

This is where Customer Lifetime Value (LTV) plays the perfect role. The LTV calculation considers the average amount of times that your products are bought by one single customer, so if you take the metric for each of your products, then you have an accurate way of knowing what areas need to improve and which areas are doing good already.

Here are a few areas in which LTV can help in your business.

  1. Overall customer experience
    1. The longer a customer decides to purchase from your company, the better customer experience your company has. If you see that on average, customers are only buying once, then you know you have a problem. The calculations going into LTV will give you an accurate picture of what you need to improve with your customers experience such as helping customers receive a good experience to buy again or making sure that unique customers turn into repeat buyers.
  2. Customer support
    1. Great customer support can make all the difference in those who buy once and those who buy over and over again. The more you have repeat buyers, the better your LTV will be. Consider this as you calculate your customer’s lifetime value and discover better ways to improve your customer support.
  3. Upsell Efforts
    1. When you take the LTV calculation from each of your products, you accurately know which products are doing well and which ones aren’t. When you see that one product is underperforming, this could be a great opportunity to either sell that product differently or upsell a better product to existing customers.

If you know your LTV, you know exactly where to allocate your marketing budget and how to spend your time effectively. It’s as simple and as powerful as that.

How do I calculate LTV for my business?

Now for what you’ve been waiting for. How do you actually calculate Customer Lifetime Value for your business?

To be honest, it’s an easy process with the right formula.

Once you calculate the numbers for yourself, the above content will make a lot more sense. You’ll understand what can improve and how you can use LTV specifically for your business.

Included is an LTV formula sheet and guide. On this sheet, you’ll see 4 different steps that will get you to your Customer Lifetime Value marketing metric number. Please note that the formula provided is one of the most basic ways to calculate your LTV. You’ll find different and more in-depth formulas on the web, but this one should give you what you need to get started with the important metric.

You can download the PDF by clicking here.

Summing up the basics

Although complicated to understand at first, Customer Lifetime Value can be your guide to better customer experience and more growth as a company. Do what you can to understand this metric completely, and it will change the way you look at your customers and your marketing process.

References

https://blog.hubspot.com/service/how-to-calculate-customer-lifetime-value
https://www.destinationcrm.com/Articles/ReadArticle.aspx?ArticleID=57620

Net Promoter Score

The Net Promoter Score (NPS) in marketing helps companies determine customers’ overall experience. If a consumer is absolutely positive they want to share or recommend your business to someone else they know, you know as a company that you are doing pretty well in your customer service department. It’s important to gather data and analytics about your company to improve your business overall.

I have developed a quick and easy template for you to upload into your qualtrics account to start your NPS journey. It’s free to sign up if you don’t already have an account. First, you would need to log in and click on create a project, create from existing, from a file, and finally click on the QSF file I have provided. The first fundamental question you should start out with is, “How likely are you to recommend us to a friend or colleague?” Depending on your customer’s response, you can add different questions tailored to your business to help determine why they chose that specific number on the scale. Some suggestions of other questions you could add on to the survey are, “If you could improve anything in our business, what would it be and why?” or “Do you have any suggestions for us?”

NPS is based off a scale of 1-10 with 1 being the least likely and 10 being the most likely to recommend your business. The first numbers 1-6 are you detractor scores, numbers 7-8 are your passives, and numbers 9-10 are your Promoters. To get your Net Promoter Score, you have to take your promoters and subtract them from the detractors. The more promoters you get, the higher your score will be.

Your detractors are those who didn’t have a good experience with your company, and there will always be those consumers who didn’t get what they want or are really hard to please. Sometimes things just happen that way. Your passives had a somewhat enjoyable experience, but it wasn’t that memorable or at least not enough to share it with others. Your promoters are your most loyal customers, and you want all of your customers to feel this way. Think for a moment, what is something your company can do to improve to help your customers feel more of a VIP status?

You could send out an email with the survey and maybe provide some sort of incentive for those who do fill out the review like a discount on their next purchase, a free product, or some other service about your business. With these valuable results, you can get from sending out this NPS survey, you can be on your way to making better changes to your business to fulfill the needs of your customers.

Do You Know Your Customers?

RATER Model

Did you know that only 1 out of every 26 unhappy customers complain? With so little data to learn from, it is important to discover gaps between customer experience and expectation. The RATER model is the solution to figure out where those gaps are. The RATER model was developed in 1990 and is an evolution of the SERVQUAL method. It is based on the idea that customers rate the quality of service provided by comparing their experiences with their expectations. The goal of this model is to show which areas the customers’ expectations differ from the actual offered quality.

RATER is an acronym based on five dimensions: Reliability, Assurance, Tangibles, Empathy, and Responsiveness. Your customers will be evaluating your service on based on these dimensions whether they are doing so consciously or not. So, let’s break down these metrics.

Reliability

A reliability issue could mean that you fail to deliver as promised or that your customers misunderstood what service you are providing. Benchmarks that you should consider focusing on are: timeliness, consistency, regularity, and accuracy. So, ask yourself, do you deliver the service a customer expects, when the customer expects?

Assurance

Your customers first need to know why they should trust you; then you must reinforce that trust by ensuring reliable service. You must meet their expectations by not only proving that you are credible but address their concerns competently. Benchmarks that you should focus on are: competency, respect, credibility, confidentiality, and an assurance of safety and security.

Does your organization inspire confidence?

Tangibles

Tangibles is a tricky one. It is the physical aspect of your business. Often, your customers won’t notice unless it is a negative experience for them. Depending on your service, those physical benchmarks that you should on are: facilities, equipment, technology, and employees. The best question to ask yourself is, does your company present itself professionally?

Empathy

Caring about the customer and empathizing with them is important. But there is someone else you have to think about when it comes to this metric. The stakeholder. You can show empathy by providing: Access to staff, services and information; clear, appropriate and timely communication; understanding the stakeholder; appropriate service for customer needs; and individualized attention. A question to ask yourself is if your team members are understanding and empowered to solve problems?

Responsiveness

If you want to win the heart of the customer and convert them into a lifelong buyer. You must show a willingness to help by providing prompt service through the channels they prefer. This means your customer service must be accessible by phone, email, text, and even social media. Benchmarks to focus on are: Willingness to help, prompt attention to requests, problem resolution, complaint handling, and flexibility. A question to ask is, does your team address queries within the expected time frame?

The RATER model is the best way to organize and evaluate customer feedback. If you want to identify gaps between customer expectations and your service, use this model. Now you tell me, are these the only metrics we should measure? Comment below what other metrics should be included and why.