Lifetime Value of Customer - Explained
What is Customer Lifetime Value?
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
Table of ContentsWhat is Customer Lifetime Value? How To Calculate LTVHow Is LTV Used?How To Increase Lifetime ValueAcademic Research on Customer Lifetime Value
What is Customer Lifetime Value?
The life time value is regarded as an estimate regarding the average revenue that the company is going to generate from the customer during the lifespan of customer or company. The customer is attached to the company and spends money at the company throughout his life. This reality helps the company to make economic decisions. In additional to projecting revenue, the company will use information about the customer unmaking decisions like marketing budget and sales forecasting.
Back to:BUSINESS & PERSONAL FINANCE
How To Calculate LTV
The life time value of the customer can be calculated in the different depending upon the business model employed by the company. For example, the life time value is a very important metric used in the subscription-based business model. This model calculates the monthly recurring revenue, known as MRR. First, calculate the average monthly amount of expected revenue from each customer. This average is divided by the churn rate of the customer. Churn rate means the rate at which the company loses the customers each month. This means that the life time value is the ratio of the average monthly amount expect from the customer to the rate at which customers are lost. For example, if the average amount expected from the customer is $400 and the churn rate of the company is 0.04 or 4% , then the life time value is 400/0.04 = $10000. Then the average life time expected is given by $10000/400 = 25 yrs In case of non-subscription models, Lifetime Value is calculated by multiplying the average order value by possible expected number of purchases by customers. In this model the average order or expected number of purchases by customers can grow or reduce over time.
How Is LTV Used?
Revenue forecasting is very important for any company because it shows the revenue earned by the company in future. The life time value has been the key variable for the company in revenue forecasting. The difficult lies in the fact that new or additional customers are always able to bring additional revenue every month to the company. The life time value is helpful in determination of the marketing budget of the company. There are certain segments of customer that provide extremely value insights for he company. Notably, the acquisition cost is the cost used for acquiring the new customer or additional customers to the company. It is important to understand this metric for each market segment, as different marketing methods affect each segment differently. The life time value is also used for the resource allocation for current customers. The customers with high life time value should receive more resource. Of course, the lifetime value is dependent on the customers stage in the customer life cycle, and the potential for renewal of the cycle.
How To Increase Lifetime Value
Increasing the life time value of new customer means:
- Reducing the churn rate of the company.
- Increasing the length of the customer lifecycle.
- Increasing the average value of purchases per customer.
These will increase the long-term profitability of the company and make company stronger in competition. Strengthening the brand name and trust among competitors is critical for retaining the customer and increasing customer base. The non-subscription pricing model, increasing -add ons or up sells, is one of the effective methods of increasing life time value of the customer.
- Marketing - Why is Growth Important?
- How We Judge the Value of New Ideas
- What is a Sustainable Competitive Advantage?
- What is Return on Investment?
- What is Time to Profit?
- Market Share
- Market Leader
- What is Product Development?
- What is Market Development?
- What is Market Penetration?
- New to Market
- What is Diversification?
- What is Competitive Advantage?
- What is Marketing Analytics?
- A B Split
- Data On-Boarding
- Cost Per Acquisition
- What is Customer Lifetime Value?
- Churn Rate
- Measuring Environmental Impact
Academic Research on Customer Lifetime Value