Knowing the lifetime value of a customer is useful for any business. This information will help you develop in the right direction. For some industries, LTV is especially important - for example, for SaaS companies. Their business model is designed for long-term interaction with the client.
LTV turns abstract customer value into concrete numbers. It’s one thing to constantly convince yourself and others that “the client is very important to us,” and quite another to know that on average customers bring you 10 thousand mana.

Why calculate LTV

LTV measures the value of a customer in rubles. This is important, but not the only benefit that the indicator provides to business. LTV also helps:
  • Understand how much to spend on attracting and retaining customers. Without LTV, it’s difficult to say whether to reduce advertising costs or, conversely, increase them. If LTV = 10 man., and costs are only 1 man., you can afford to spend 2-3 times more.
  • Determine how quickly the funds the company spends on attracting new customers will pay off. If we spent 1 mana and LTV = 10 mana. and the client’s lifespan is 5 years, then the costs will be recouped in the first year.
  • Identify high and low value customers. This will help you concentrate your efforts on more attractive segments. Let's say client A bought for 100 mana. and fell off, and client B places an order for 20 mana every month. (240 man. per year). Obviously, the company is more interested in client B, although his average bill 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 mana, and the LTV of clients from advertising in social networks is 50 mana, it is better to focus on setting up Yandex. Direct and Google Adwords.
  • Pay more attention to working with existing clients. LTV clearly shows how much more each customer can bring, and thus motivates you to think more often about how to retain them.

How to calculate LTV

Formulas for calculating customer lifetime value vary in accuracy. The more precise the result is needed, the more factors have to be taken into account, and the more complex the formula becomes.

Simple option: The easiest way to do this is to divide your total revenue (or contribution margin) by the number of customers:

LTV=D/K where: D - total income K - number of clients

The main disadvantage of this approach is that it is not clear for what period to take data. Take it over a month, six months or a year and you will get three different results.
In addition, new customers will also be included in the total number of clients. The problem is that their contribution to income is still insignificant (they bought it for 100 manats, but will order another for 1000 mana). This difference will be reflected in LTV. As a result, you will get some number, but you are unlikely to be able to benefit from it.

Best option: This formula takes into account more factors. It can be used to estimate LTV accurately enough to use this information to make business decisions.

LTV = AOV x T x AGM x ALT where: AOV - average check T - average number of orders AGM - average margin ALT - average customer lifetime

Some people leave out the average margin in the formula. This is also possible. Then you will get lifetime income from one client instead of profit. Count it however you want. The main thing is that you feel comfortable using the results obtained. If you don’t have data on the average customer lifespan, calculate this indicator through churn:

ALT = 1/Ch where CH is the outflow coefficient. Ch=(CB-CE)/CB x 100% where: CB - number of clients at the beginning of the period CE - number of clients at the end of the period

What LTV is considered normal?

I think it’s already clear that there is no standard for LTV. Each company has its own optimal level of customer lifetime value. You can look at the average in your area of ​​business, but it's not that easy to figure out. Another option is to compare LTV to customer acquisition cost (CAC). It is believed that the following ratio should be adhered to:

LTV ≥ 3 x CAC where CAC is the cost of attracting customers

This ratio was first voiced by David Skok based on an analysis of successful SaaS companies. It is unclear how suitable it is for other industries. Therefore, it is better not to get hung up on finding the norm, but to monitor the dynamics of LTV and direct efforts to increase this indicator.
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