LTV turns abstract customer value into concrete numbers. It’s one thing to constantly convince yourself and others that “the customer is very important to us,” but it’s quite another to know that your average customer brings you $100 each.
Why count LTV
Knowing the lifetime value of a customer is useful to any business. This information will help you grow in the right direction. For some industries, LTV is especially important – like SaaS companies. Their business model is designed for long-term interaction with the customer.
LTV measures customer value in money. This is an important, but not the only, benefit that LTV brings to a business. LTV also helps:
- Understand how much to spend on customer acquisition and retention. Without LTV, it’s hard to say whether to cut advertising costs or, conversely, to increase them. If LTV = 100 rubles, and the cost – only 10 rubles, you can afford to spend 2-3 times more.
- Determine how quickly the money the company spends on attracting new customers will pay off. If we spent 10 rubles, and LTV = 100 rubles and the client lifetime is 5 years, the costs will be recouped in the first year.
- Identify customers with high and low value. This will help you focus your efforts on more attractive segments. Let’s say client A bought for 100 rubles. and left, and client B makes an order for 20 rubles. every month (240 rubles per year). Obviously, the company is more interested in the customer B, although the average receipt is much lower.
- Find out which advertising channels bring more valuable customers in the long term. This information is important to consider when allocating budget between channels. If the LTV of clients from contextual advertising in search engines is 100 rubles, and the LTV of clients from advertising in social networks – 50 rubles, it is better to focus on configuring Yandex. Direct.
- Pay more attention to work with existing clients. The LTV clearly shows how much more each customer can bring, and thus motivates you to think more often about how to keep him.