Lifetime Value (LTV)
Lifetime Value (LTV), or Customer Lifetime Value (CLTV) or, also called Lifetime Customer Value (LCV) is one of the most important eCommerce metrics. LTV is the main metric that contributes to the net profit and long term revenue of enterprises.
Customer lifetime value can be defined as the monetary value of a customer relationship, based on the present value of the projected future purchases of the shopper. To simplify, LTV refers to the amount of revenue that a business can expect to generate from a shopper during the period over which the business will be of value to the customer.
How to Calculate LTV
In order to calculate the customer lifetime value (LTV) for each of your customer segments, you’ll need to track down three key functions of customer data within the pre-defined timeframe:
1. Average Order Value
2. Purchase Frequency
3. Customer Lifespan
LTV = AOV x Purchase Frequency x Customer Lifespan
For example, the average order value for an eCommerce business, ABC, is $50, and the average customer shops with them 5 times a year for two years. The lifetime value of this customer is calculated as follows:
LTV = $50 x 5 x 2 = $500
Importance of Lifetime Value
LTV is a metric of immense importance to marketers because of the following reasons:
- Customer lifetime value helps to assess the financial value of each customer by attaching values to them and quantifying them as valuable assets.
- It also represents the upper limit on the money spent to acquire new customers (or, the money spent to avoid an existing customer from leaving)
- It encourages enterprises to shift their focus to the long-term health of their customer relations rather than focusing on just quarterly profits or revenues.