Lifetime Value or LTV measures the total value of a customer to a business throughout their entire relationship. Customer lifetime value is a metric that indicates the total amount of money, sales, or revenue a company can reasonably expect from a customer throughout their lifetime as a customer.
For example, let’s say you have an eCommerce store selling customized bath bombs. If a customer spends an average of $500 per year and does so for an average of five years, then the average customer lifetime value would be $2,500.
LTV is one of the critical metrics for SaaS companies to track as it costs much more to acquire new customers than it does to retain existing customers. Thus, it is crucial to boost the lifetime value of your existing customers to drive long-term business growth and profitability.
How to calculate LTV
To drive customer LTV for each of your customer segments, you’ll need to measure three fundamental values of customer data within the same timeframe.
- Average order value (AOV): It is the average amount spent each time a customer places an order on a website or mobile app.
AOV = Revenue / Number of Orders
- Average purchase frequency (APF): It is the average number of orders placed by a customer on a website or mobile app.
APF = Total no. of orders / Total no. of customers
- Average customer lifespan: It is the average time a customer continues to buy from your business.
The formula for calculating LTV is,
LTV = Customer value x Average customer lifespan
LTV = AOV/APF X Average customer lifespan