Average lifetime value (LTV)
Definition
Average lifetime value, or LTV, is a metric that tells you how much money an average customer will bring your business over their lifetime.
The result is an estimation of how much revenue you can expect from each customer, which can help you determine how much money to spend acquiring new customers, and how much to spend on retaining existing customers.
How is Average lifetime value (LTV) calculated?
It's calculated by taking the average lifetime of all customers and multiplying it by the overall average spend per account or user.
The formula for calculating Average lifetime value (LTV) is:
LTV = Avg. Lifetime * ARPA
Example:
So if on average, your customers have spent $1000 a month and the average no. of months that a customer has stayed subscribed in the past is 16 months, your calculation would be as follows:
16 x $1000 = $16,000.
Why is Average lifetime value (LTV) important to measure?
It's easy to focus on acquisition and think that the only goal is to get as many new customers as possible. But if a business only acquires new customers and doesn't focus on retention, then it will have a very low LTV.
On the other hand, a business with a high LTV is more likely to be profitable in the long run because it means that the company is not only acquiring new customers, but also retaining them.
For example, a company with a high LTV can afford to spend more to acquire new customers than a company with a low LTV. This is because the high LTV company will earn back its investment plus more, while the low LTV company will not.
What's the difference between churn rate and LTV?
Churn rate measures how many customers are leaving compared to how many are staying. You calculate churn rate by taking the number of customers who've been inactive for a period of time (usually 30 days) and dividing it by the total number of active customers at that time period. LTV measures how much revenue has been generated from each customer over their entire lifetime with your company—it doesn't matter if they've been inactive for a while or if they're still active today!
What is a good LTV?
Again, there is no definitive answer, as it varies from industry to industry. However, a general rule of thumb is that a good LTV should be at least 3x the Customer Acquisition Cost (CAC).
How can I improve my company's LTV?
There are a few different ways to do this, but some of the most common include:
Improving customer retention rates
Increasing the average order value
Increasing the frequency of purchases
Cross-selling and upselling
