What is lifetime value?
Lifetime value, abbreviated as LTV, is the total benefits a client is expected to bring to a company. Companies use this metric to determine a company’s net value from a relationship with a particular client. It is also known as Customer Lifetime Value (CLV).
Lifetime value is a critical aspect any business should consider. This is because it determines and informs the marketing and sales strategy a company will employ to ensure that it reaps maximally from the said client. In other words, it paints the long-term/future picture of a business’s finances.
To the service-providing firms, LTV is crucial. This is because it’s used to check whether the effort in service provision matches the value a customer brings. This, in turn, helps the business enhance its lead generation efforts.
Importance of Calculating LTV
As one of the eCommerce metrics, LTV calculation provides businesses with several advantages.
Helps Redefine Marketing Goals
LTV calculation helps a business develop precise marketing strategies. A company can determine high and low-value clients and know where to focus its marketing efforts.
Further, it helps a company balance long and short-term marketing strategies. A company understands which methods bring more results with such proportions, thus concentrating on them.
Helps in Customer Retention
After helping with marketing goals, LTV further helps a business with what to do to retain high-value clients.
Knowing each client’s value informs a business’ next steps in cementing the relationship and earning more from the clients.
In What Areas is it Necessary to Calculate LTV?
The core goal of any business is to have a continuous profit-making trend. As such, any company should calculate LTV in all its decisions, which is only possible after instituting proper and accurate mechanisms for LV determination.
Additionally, it is essential to note that LTV may differ from company to company. Some may calculate it in the long term and others in the short time, depending on customer type, business, and goals.
A company that deals with many customers has a higher LTV, and each client has a significant value they bring to the company. On the other hand, businesses in the subscriptions or services have a lower LTV from each of its clients. This is because such companies experience an attrition or churn rate, simply the number of customers opting out of the services.
How to Calculate the Lifetime Value (LTV) of an Asset
As earlier stated, LTV calculations vary from company to company. The concept is also applicable to assets, of which clients are assets, and the value depends on the business model.
LTV is influenced by the Monthly Recurring Revenue (MRR) for subscription services. MRR is the total amount a business earns from all the active subscriptions. To calculate LTV for such firms, you divide the MRR by the percentage of customers leaving each month.
LTV calculation is unavoidable in the eCommerce world, especially those that deal with service provision. To benefit from LTV, a business should set a calculation mechanism to help it determine worthy and not-so-worthy clients.