LTV Meaning and Its Impact on Your Business
One of the most fundamental aspects of running a successful business is measuring progress and identifying areas with potential for improvement.
There are hundreds of tools and datasets available to measure your company’s success. Understanding what each metric tells you and how you can use the information to boost growth in your business keeps you ahead of the competition.
Lifetime value, or LTV, is a crucial metric that can tell you more about how your company will succeed in the future. Learn about how LTV affects your business by reading this handy guide and learn all about LTV meaning.
What is LTV?
Lifetime value — sometimes referred to as CLV or customer lifetime value — is the projected net profit you can expect to generate from one customer over time. Essentially, it’s how much money your business will make from one customer throughout the client relationship.
For example, your average customer might stay for about five years and spend $3,000 on your products or services during that time. You would use these factors to calculate your overall LTV.
Various industries can have vastly different LTV expectations. A private college may expect a relatively short-term retention of four years, but ultimately have a higher LTV due to the value of private secondary education. On the flip side, big retailers may have a longer retention period and rely mainly on many small-profit purchases to attain a medium or high LTV.
How to calculate lifetime value
The simplest way to estimate your company’s LTV is to use an online calculator that does all the hard work for you. All you have to do is fill in your data.
Most LTV calculators use the following information and steps to determine your customer lifetime value:
- Determine your profit from one customer’s average total order amount — how much one customer spends on average in one transaction.
- Multiply your answer from step one by the average number of transactions you expect a customer to make in one year.
- Multiply this number by your average retention rate and subtract the cost of attaining a new customer.
Why is LTV important?
Lifetime value gives you one way to estimate marketing costs, analyze your acquisition strategy and determine if your company is growing toward a successful profit margin.
Knowing how much you can expect to make from one customer can help you determine how many customers you need to reach new milestones for success. An accurate LTV makes it easier to calculate future growth scenarios and set reasonable goals for your company.
Maintaining a high LTV gives you the following competitive advantages:
- Steady cash flow: Repeat orders from satisfied customers gives your business a secure cushion of consistent income.
- Freedom to acquire more target customers: A high lifetime value compared to the costs of acquiring a new client gives you a greater ability to target customers who have the potential to increase your LTV even more.
- Boosted growth: A strong LTV gives your company consistent funds to channel toward new growth avenues.
- Enhanced profitability: Lifetime value increases your bottom line, maximizing your profits and giving you greater cost-efficiency.
How to increase lifetime value
A healthy lifetime value is necessary for your business to stay afloat and prosper. At a minimum, your company’s LTV must be greater than the cost of acquiring a new customer. This ensures your business can survive long into the future and continue to grow.
Increasing your company’s LTV is one way to foster growth and profitability. There are numerous ways to boost your company’s lifetime value. Below are some key strategies you can use to increase your LTV and find greater success.
Adjust your prices
It’s important to evaluate your prices to determine if they’re sustainable in the current market. Price points fluctuate constantly. If you find yourself continually sitting below the curve, analyze how your prices compare to those of similar companies or industries and adjust accordingly.
Try increasing prices for new customers first, since they are less likely to be familiar with your previous prices. This method will give you a greater LTV moving forward.
Simplify your onboarding process
Streamline the conversion process as much as possible to make it easy for new customers to begin their relationship with your company. Modern customers have shorter attention spans, so a smooth, intuitive user experience is essential for retaining new customers.
Make your onboarding process a breeze to gain a loyal following.
Implement a referral program
Offering discounts or other incentives to customers who recommend your business to their friends is an excellent, cost-efficient way to broaden your network. A referral program is beneficial to the customer — who gets rewarded for their efforts — and the business.
You can gain exposure to your existing customers’ network and receive the potential to increase your LTV by converting more users in the process.
Establish a rewards program
Similar to a referral program, a rewards program gives your existing customers the chance to earn incentives for spending more. Increasing the number of transactions each customer makes boosts your lifetime value and generates more than enough revenue to pay for the rewards you offer your customers.
Make business transactions convenient
In modern business, convenience is everything. Customers enjoy a quick, seamless purchase experience. Make navigating your site easy and ensure your checkout process is simple, with only a few steps.
You can even store previous customers’ information on your site, so users can efficiently complete sales without retyping the same information into your forms again. Details like these can encourage customers to keep coming back.
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