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

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