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Simple ways to increase LTV for eCommerce. Marketing Strategies to Increase Customer Lifetime Value: Example Companies What is the concept of Customer Lifetime Value

LTV (customer lifetime value) is the total amount of all estimated income that can be received from him in the future: from purchases of goods or services. This calculation is extremely important for a business, as it allows you to make the right decision about investing in acquiring new customers and retaining existing ones.

For example, a Honda customer's lifetime value could be $6 million, as a happy customer is able to purchase multiple models over time. The LTV of a regular coffee shop customer can be even higher than the first figure: it all depends on how many cups of coffee he drinks every day and where exactly he buys them. At the same time, the lifetime value of a client who bought a house, taking into account a possible second purchase during his life, can be only 500 thousand rubles. In this case, the option for the agency's profit is considered: despite the high cost of the house, the commission is only a few percent. In total, it turns out that a buyer of a house can have LTV 5-10 times less than a regular visitor to a coffee shop.

In general, the LTV indicator is a key point for understanding exactly how much money is worth investing in a particular group of buyers and specific individuals. It is clear that the total cost of attraction cannot be equal to or higher than the lifetime value of the buyer, because then the expediency of all marketing as a whole is lost.

Formula for calculating LTV

LTV = average purchase receipt * how many times a year a purchase will be made * the duration of the relationship between the buyer and your company (from the moment of involvement)

Take for example a professional runner who constantly buys shoes from the same company:

5 thousand rubles for a pair of shoes * 4 pairs per year * 8 years = 5000 * 4 * 8 = 160 thousand rubles

LTV of the mother of a child 8-10 years old:

800 rubles for a pair of shoes * 5 pairs per year * 3 years = 800 * 5 * 3 = 12 thousand rubles

So, who should be given special attention? These examples make the decision clear and help you budget to retain a loyal customer.

Why do you need to know LTV (customer lifetime value) in marketing?

The calculation of LTV is mainly necessary for making decisions in the marketing department on interaction with new and regular customers. However, this indicator can help determine the following points:

  • How much can you spend on a specific customer and still make a profit;
  • What products or services do the highest scoring buyers want?
  • Which products have the highest value for the company;
  • Which group of buyers should be given more attention.

All these solutions together can significantly increase the company's profits and create a solid layer of regular profitable customers.

Increasing the value of LTV in the company

According to statistics, the probability of a repeat purchase of a buyer who has already bought a product or service from you is about 60-70%. At the same time, the probability of buying a new visitor is about 5-20%, depending on the business sector. Obviously, it is much easier to pay attention and work with the first type of customers to increase sales. But what ways will help increase the likelihood of a purchase? Here are some tips for working with regular customers:

  • Work out a simple and quick way to return the goods. This will make your relationship with the buyer stronger and most likely turn it into a permanent one;
  • Set delivery times for stock. For example, if your estimated delivery date is late August, set the date to September 1st. The client will be pleased if he receives the goods on August 20 and will not be upset if the goods arrive at the very last moment;
  • Create a system of rewards for buyers: the main thing is that they are pleasant and achievable;
  • Distribute samples for the opportunity to get regular customers almost for free;
  • Work on your cross-selling strategy. They are able to increase the average bill and total profit per client;
  • Keep in touch with them constantly: let buyers know that they are remembered.

You will be able to build profitable business, focusing on attracting and retaining loyal customers who will regularly generate the most revenue in the future.

Customer lifetime value is, simply put, how long a customer will be associated with your product. But not all clients can be equally useful for business. There are many "sleeping" buyers on the market, and the most active consumers may prefer yours. Such multidirectional interests constitute the target, for which one has to fight.

Target market must be specific

One of the important principles of marketing management is building an effective marketing strategy based on targeting and positioning. The first step is to classify the client base. Otherwise, all your customers can be considered just a population that consists of various groups that are not differentiated among themselves. Organization of sales in such a situation is a big risk to waste your time and money. In essence, businesses clearly don't know what the right marketing strategy to use and how to sell most effectively.

Target market must be valuable

Customer segmentation is aimed at highlighting the most attractive, able to regularly buy your services. Proper marketing starts with the most attractive segment, which can be reached with a clear and understandable advertising message.

Targeting is the next step to success. It is necessary to effectively attract customers from the selected segment. Customer preferences determine strategy. If you are targeting the youth segment, then your products should be more creative, more colorful and cheaper. Your advertising messages must be bright. But if you're targeting middle age, your product needs to be elegant. This is natural because consumers have more purchasing power. And your promotions should highlight the unique benefits of the service. Thus, the targeting strategy will optimize advertising costs.

Once you have your segment in place and know who to target, you begin the fine art of positioning. The bottom line is to distance yourself from direct competitors according to criteria that are important to customers. If targeting mainly affects the Product and Pricing stage of marketing, then positioning affects the promotion stage and elements of the marketing mix.

When targeting, you need to tailor according to your target segment. Positioning requires making sure that the right advertising message is conveyed to your target segment and that the right products are being offered at the right time.

New customers or regular customers?

Analyzing the current market situation, you will try to find in order to expand your sales market. You will attract new customers and involve them in your area of ​​interest. Advertising costs may vary. This is due to varying degrees of awareness of potential buyers about your offer to the market. In addition, some new clients will be more demanding and compare the company's services with their accumulated experience. For such buyers, more persuasiveness is required.

It is a well-known fact that a company spends more money on attracting new customers than on retaining existing customers. Thus, calculating the cost of living of a client helps to understand exactly what level of income is generated from each client. In addition, a systematic cost analysis provides insight into the difference between the average cost of acquiring new customers and retaining old customers to identify ways to maximize sales revenue.

What is lifetime value (LTV)

First of all, it is the expected profit that the business will be able to receive from sales from each regular customer in the future. Although the calculations are based on the past history of the relationship with the customer, the lifetime value value is information about the future. The customer base KPI is based primarily on the expected retention rate and costs associated with this process.

The expediency of retaining customers is largely dependent on the value of lifetime value. In fact, customer lifetime value (CLV) or customer lifetime value (LTV) is the net present value of the cash flows associated with customer relationships. Using this KPI as a marketing metric forces a business to focus more on customer service and long-term customer satisfaction rather than maximizing short-term sales.

How to calculate LTV?

To understand LTV, I suggest using a typical table for calculating lifetime value (all data is fictitious).

Let's say that in the first year you built a customer base of 1,500 customers. Subsequently, you collected statistics about your regular customers, and noticed that in the first year, 40% of buyers did not make repeat purchases. Naturally, you need to grow your customer base, cover your target market original advertising in order to attract new customers. Every year, the whole process of fighting for a client will continue, but someone will never return to you.

Obviously, the loyalty of retained regular customers is higher than that of newly recruited ones. As customers stay with you, their number of orders per year and their average order size tend to increase.

The cost of serving loyal customers is usually lower than the cost of new customers. The company needs less effort to prove the superior qualities of the product. With this fact in mind, you can optimize marketing costs, which will increase business profits without loss.

Business invests for future profit

A company's profit is simple: income minus expenses. But the value of money changes from year to year due to inflation. Additional funding may be required to create a loyalty program. Therefore, it is necessary to divide the resulting profit by the discount rate to calculate the net present value of the expected profit. A discount rate (based on bank interest rates) is needed because future profits are not worth as much in today's money as the company's estimated profit.

This postulate is based on the concept of the value of money, taking into account the time factor. The money that a business can invest in building long-term customer relationships should be profitable, but its value changes over time. An investor for every 100 rubles can receive additional income for the year from alternative investment options. For example, he can simply put them in the bank for a deposit and return them without risk with interest. Consequently, in a year, each investment ruble will be of great value to the investor. Determining the value of future earnings at the moment is called discounting. In this case, the discount rate is the rate of return on invested capital required by the investor.

In the examples under consideration, you yourself become an investor, and take the missing amount of investment from the bank as a loan. The discount rate will take into account the percentage of the deposit and the cost of borrowed funds.

After discounting the company's profits for the second and third years, you can calculate the company's accumulated net income generated by the implementation of the customer retention program. If we calculate the lifetime value of customers without discounting (just add up the company's profit for three years and divide by the number of customers in the first year), our calculations will not include the profitability of the company (for the business owner this is a significant point), despite the fact that it directly affects the definition the effectiveness of investments in attracting new customers.

The result of all calculations allows you to determine not only future income from regular customers, but the dynamics of their changes. The Customer Lifetime Value table can be used to estimate the expected results of new marketing programs before you spend a lot of money on them.

Summary

The benefits of a systematic approach to customer retention based on a lifetime value calculation force us to look at the costs of a loyalty program as an asset that can generate income, and not an onerous liability.

The calculation of LTV reveals a balance between the cost of attracting new customers and the company's profit while retaining regular customers.

customer lifetime value(customer lifetime value, CLV or often CLTV), lifetime value(life-time value, LTV) is a prediction of net income associated with all future relationships with a client. The prediction model can have different levels of sophistication and accuracy, ranging from approximate, heuristic, to complex, using predictive analysis techniques.

Customer lifetime value can also be described as the monetary value of the customer relationship based on the current apparent future cash flows from the customer relationship. Customer lifetime value is an important concept in that it encourages companies to shift their focus from quarterly earnings to long-term healthy relationships with their customers. Customer lifetime value is an important number as it represents the upper limit of the cost of acquiring new customers.

One of the first mentions of this term was made in 1988, in the book Database Marketing, which contains detailed working examples.

Target

The purpose of the Customer Lifetime Value (LCV) measure is to gain access to the financial value of each customer. Don Peppers and Martha Rogers are credited with the following quote: "Some clients are more equal than others." The value of customer lifetime value (the difference between income and customer relationship costs over a given period) is that CCP looks into the future. In fact, the PCC is useful in the formation of managerial decisions, but it is very difficult to determine. The calculation of the PCR implies the prediction of future activity.

Many companies analyze customer lifetime value (CLV) to determine the financial benefit (value) from a relationship with a particular customer. Let us consider the features of the analysis of this indicator, using an interactive form for calculation.

Figuring out which clients to invest time and money in is critical if you want to maximize your profits.

Many companies analyze a metric called customer lifetime value (CLV) to determine the value of a particular customer compared to other customers.

Even if you don't have to calculate the CLV yourself (there are now many tools that do all the math for you), it's important for you to understand the concept of this metric so you can decide whether to use it in your marketing and management decisions.

What is CLV?

Here is the basic definition:

The amount of profit your company can earn from a given customer over the time that person (or company) remains a customer (for example, nth number of years).

At its core, CLV is the present value of all future revenue streams that a given customer generates over the life of their relationship (as a customer) with the company.

This is a very useful indicator.

By comparing CLVs across clients, you can determine which ones are more or less profitable for you. So you can segment your customer base.

Understanding the profitability of each client is the first step to managing your client base. You can then decide where to focus your marketing, product development, customer acquisition, and retention efforts.

The mathematical basis of the CLV indicator is quite complex - it is not something that is easy to do "on the knee".

CLF formula:

  • CR = customer revenue,
  • C = direct marketing costs per client,
  • R = customer retention rate,
  • d = discount rate,
  • AC = customer acquisition rate.

The interactive form below allows you to make an automatic calculation and understand how the various elements of the formula affect the final result.

Note: There are several ways to calculate CLV. This interactive illustration shows you one of them.

To use the interactive form, adjust the sliders on the left side - you will see how each factor affects CLV over five years and the expected contribution to coverage (eng. "contribution margin") per client for each year.

An example of a customer lifetime value analysis.

Now imagine that you have a print shop and you would like to find out which category of your customers is most valuable to you:

  • small firms who use services almost regularly or
  • large companies who make orders only a few times a year, but for significant amounts.

Let's start by finding out the CLV for the first group.

On average, these small customers buy from you 10 times a year and spend $200 per order. Install average number of purchases per year at 10 and average spend per purchase at $200.

Average gross margin for these orders is 41% (set the slider accordingly).

Now the question is how much do you spend on marketing and how effective are your efforts?

Your total marketing budget is $10,000 per year and you have a total of 500 clients, so your Direct marketing costs per customer per year are $20.

You've been making calls and mailings to local businesses to acquire new customers, and you've discovered that for every 100 mailing lists you send, you get 2 new customers. So set the slider customer acquisition rate in 2%.

You have done a good job of keeping customers over the years, so your customer retention rate is 80% for this category of clients (small firms). Set the appropriate value with the slider.

The last thing you need to define is your average discount rate.

When calculating CLV, you determine the average annual return per client over a given number of years. But the profit you make in the future is less valuable than the profit you make today.

Discount rate in the CLV equation is needed to calculate the present value of this future profit and corresponds to the present value of money. Different companies may use different rates, but let's say that you predict that 10% will be the most accurate rate.

You can see that for this category of clients, the five-year CLV is $699.

To compare this result with another category - your large customers, change the parameters as follows:

Large companies order about 3 times a year.

  • But they spend almost twice as much per order, so set your average spend per purchase to $400.
  • The gross profit (eng. "Average gross margin") is slightly higher: 50%.
  • Your mailings and calls are more effective for this category of clients. The customer acquisition rate (English "Acquisition response rate") is 4%.
  • "Direct marketing costs per customer per year", "Average discount rate", and "Average customer retention rate" remain unchanged .

Now the CLV is $732, which is slightly better.

This may mean that you should spend more resources on large clients. Perhaps you should develop loyalty programs for these customers or make other efforts to keep them.

The most important thing here is that using this model for analysis, you can see how various factors will affect CLV.

For example, what will happen if the average annual number of orders increases, the marketing costs decrease, or the customer acquisition rate increases.

LTV, CLV, CLTV. The names are different, the essence is the same. What is it and why should every marketer know this metric? Read on.

What is LTV?

LTV (Lifetime Value) is the total profit of the company received from one client for the entire time of cooperation with him. There is also a simplified version of the Russian definition, which briefly characterizes this indicator - the lifetime value of the client. This is the most common translation. This metric is also called CLV (Customer Lifetime Value) or CLTV.

Why is it important to know LTV?

LTV is one of the most important metrics in business (especially E-commerce). David Skok, a well-known venture capitalist, says in his article that most startups die because the cost of acquiring a new customer (CAC) "outweighs" the lifetime value of the customer (LTV), and it looks something like this:

As practice shows, most often this advantage is due to the fact that we focus on the implementation of the transaction and often forget about the experience that the client receives after the conversion.

Knowing LTV will help you:

  • Determine the real ROI by the cost of attracting a new client.

    LTV will help you focus on the channels that bring in the best customers. After all, it is better to optimize your marketing channels based on the profit that the client brings in over time, rather than on the income from his initial purchase. Therefore, you can maximize the lifetime value of a customer relative to the cost of acquiring a new one (CAC). By doing this, you will completely change your customer acquisition strategy.

    Perhaps you will realize that you are overpaying for it. And you are not limited to knowing the income from one purchase, but you know how much you get from each client for the entire period of your interaction. Information about your high LTV customer will also give you a clear idea of ​​who you should be targeting. This information combined will allow you to stay ahead of competitors who do not have this data.

  • Improve customer retention strategy.

    The value of a marketing campaign (such as one that converts a once-purchased customer into a loyal customer) should not be based on current revenue. It should be measured in terms of its impact on the average LTV in the consumer segment you are targeting. How has this changed the trajectory of the LTV we get from the average customer? To calculate this, you need accurate analytics and then you can see how LTV changes under the influence of various marketing activities.

  • Create more effective messaging, targeting and informing customers.

    Segment your customers by LTV. This way you can improve the relevance of your marketing campaigns with more personalized messages. The important variable used here is the types of products you sell to customers in different segments.

  • Improve behavioral triggers.

    By using cluster techniques, you can discover new behavioral triggers that motivated your customer to make their first purchase. You will be able to duplicate this behavioral factor with your new potential clients, pushing them to the first acquisition.

  • Improve performance through customer support.

    Focus your time on paying special attention to your most valuable customers.

There are several approaches to calculate LTV. There are quite complex and confusing, and there are simple, but less accurate. Below are four formulas, each of which has the right to exist.

  1. Simple formula:

    LTV = customer revenue - the cost of attracting and retaining a customer.

    Example from Topanalytics: 1st purchase - 200 clients, 1500 rubles. the average check, the cost of attraction - 300 rubles, the cost of production - 850 rubles; 2nd purchase - 90 customers (let's say that the second purchase is made by 45% of customers), the average check is 400 rubles. (because they buy only consumables), the cost of retention is 60 rubles, the cost of consumables is 50 rubles.

    Subject to a single purchase: Profit1 = 200 * (1500 - 850 - 300) = 300,000 - 170,000 - 60,000 = 70,000 rubles. LTV1 = 70,000 / 200 = 350 rubles ROI1 = (70,000 - 60,000) / 60,000 * 100% = 16.7%

    Subject to two purchases: Profittotal = Profit1 + 90 * (400 - 50 - 60) = 70,000 + 26,200 = 96,200 rubles. LTVtotal = 96 200 rubles / 200 = 481 rubles ROItotal = (96,200 – 69,900) / 69,900 * 100% = 37.6% ROI2 = (641 - 360) / 360 * 100% = 78% Please note that this formula is the simplest and does not take into account many details, such as customer growth.

  2. Basic formula. This way of counting is more accurate:

    LTV = (average cost per sale) x (average number of sales per month) x (average customer retention time in months)

    Brad Sugars from Entrepreneur.com provides a simple example of calculating LTV. A gym member pays $20 per month for a membership for 3 years. $20 x 12 months x 3 years = $720 in total revenue or $240/year. The gym owner will be able to use this information to calculate a profitable acquisition and retention cost.

    However, it is worth considering that not all clients will be with the company for 3 years. Note that averages are always inaccurate. If you want to calculate the true lifetime value of your customers, you need to consider:

    a) Purchase of personal training;

    b) Payment for additional classes;

    c) Purchase of related products (sports bar, equipment, etc.)

    You should also analyze the data and the correlation between those gym members who keep buying memberships and those who drop out.

  3. Actual (historical) formula.

    It is simply the sum of the total purchase history revenue for each individual customer. Add the sum of all customer purchases (transactions) to transaction N, where transaction N is the last purchase the customer made in your company. If you have access to all customer transaction data, then you can easily calculate this using Excel.

    So, LTV = (transaction 1 + transaction 2 + transaction 3... + transaction N) x revenue share.

    Calculation of LTV based on the net profit in the end and shows the actual profit that the client brings to your company. Here, the cost of customer service, the cost of retention, the cost of acquisition, etc. are taken into account. The result is a whole complex of calculations based on individual data. The cumulative profit generated by a single client over time will give you an accurate understanding of your clients' profitability to date.

  4. Forecast formula.

    Predictive LTV algorithms will give you the ability to get a more accurate LTV by predicting the total revenue that a client will bring to you over time. In practice, it can be quite difficult to achieve necessary conditions, taking into account constantly changing discounts, etc. There are many ways to calculate predictive LTV, and many of them are extremely complex and confusing. Below is one of them.

    LTV = ((T x AOV) AGM) ALT, where T = average number of orders (sales) per month AOV = average check ALT = average duration of customer interaction with the company (in months) AGM = profit share in revenue.

It is correct to express LTV as the sum of all future revenues minus all the costs of attracting and retaining customers, reduced to today. Because future earnings depreciate. However, please note that this formula cannot be absolutely accurate, as it only gives a prediction.

Renowned consultant, marketing and management specialist in the UK

Prediction techniques are always limited in the range of accuracy of our calculation models and your confidence.

Conclusion

In fact, all of these formulas should only be used as a starting point for understanding your customers. And, as a rule, they need to be adjusted and adjusted to the specifics of your business and other business indicators. It is very important to make such calculations in order to understand how profitable your customers are and to improve marketing campaigns, making them more effective.

Sources:

  1. Lifetime value of the client Client Lifetime Value, CLV (Lifetime Value, LTV)