Varos Glossary

Lifetime Value

What is Lifetime Value?

The metric looks at the lifetime value (LTV) of a client relative to the revenue they bring in over time. The longer a consumer is a paying customer, the bigger their lifetime value.

Teams dedicated to the customer's success and satisfaction have a significant impact on this measure at various points in the customer's journey. Representatives in customer service and managers of customer success play crucial roles in resolving issues and making suggestions that strengthen relationships with existing customers and attract new ones.

  • What a company may anticipate earning from a single customer account over the course of their whole business relationship is measured by a statistic known as customer lifetime value (CLV).

Decisions in the corporate world may also benefit from this. As an example, CLV may be used to zero in on the kind of customers most important to a business and tailor marketing efforts appropriately.

How to Calculate LTV

Lifetime value may be determined in a number of different ways, and there are many formulas available.

Here are steps—along with a simple and effective formula—that will help you calculate your users' LTV:

  • Identify your typical purchase price. If you haven't been tracking this metric for  long, you may use a one- or three-month window as a stand-in for the whole year.
  • Find the typical amount of purchases made during a certain time frame. The product lifetime value of an app has a lot to do with how often you use it.
  • Find out how long users typically stay with your brand by measuring user retention. While some businesses are able to instill in their customers an unwavering devotion, most have trouble keeping their customers on board due to a lackluster user experience (UX) or a fiercely competitive market.

You now have all the information you need to get started, lifetime value calculation is done by multiplying the three values.

LTV formula:

  • LTV = Typical Order Amount x Total Orders x Retention Period

The Importance of LTV

If you know how much you can expect to make off of the average consumer, you can adjust your expenditures accordingly and keep bringing in the clients you want most.

As the old adage goes, "you can't improve what you can't measure," therefore it's important to track client lifetime value and dissect it into its constituent parts so that you can tailor your pricing, marketing, and retention efforts to drive down expenses and boost revenue.

Increased accuracy in predictions calculating CLV projections aids in planning for the future, including choices about inventory, personnel, production capacity, and other expenses. You can't avoid wasting money or falling behind on demand if you don't have a forecast to guide your spending.

One of the most important aspects of increasing CLV is reducing customer churn. Accurate segmentation based on this data will allow you to zero in on your most valuable clients and discover what strategies are most successful.

Selling at a higher price may increase LTV. However, companies have learned the hard way that raising prices too rapidly might drive away loyal consumers. Finding that sweet spot is crucial.

Profitability rises when LTV and CLV rise. The reward should show up in your bottom line if you are able to retain clients for longer and establish a company that encourages them to spend more.

Improve your LTV

You've calculated the worth of your clients to your business; now what? 

  • Raise Your Typical Purchase Amount

Raising your AOV is a smart strategy for boosting your LTV and CLV. As a consumer approaches the checkout page, you have the opportunity to upsell them on related items.

  • Foster Long-Term Connections

Trust is the cornerstone of every lasting connection with a consumer. Customers will return if they feel you have the lowest pricing on the goods and services they need. However, this is just the start. Customers want to feel like they're more than just a means to a greater return on investment (ROI), especially now that social media is such an integral aspect of branding and marketing.

  • Service to Customers

Your company has to give thought to its customer service and actively seek out methods to improve it.

Providing current clients with individualized attention, 24/7 customer assistance, and a hassle-free return/refund policy are all great ways to boost your customer service.

Customer lifetime value is a priceless indicator of success. It shows you which clients spend the most at your company and which ones will stay loyal to you for the greatest length of time.