Lifetime Value: should your company care about this metric?
To start this post, we need to ask a question: Do you know what your customer’s value is? In fact, this may be a question you are not used to hearing or asking yourself. After all, the customer is the basis for any business, and without them there is no company, which is why they are extremely important for your business.
One of the reasons why it is not so common, especially when we talk about small businesses, is the fact that many do not know how to measure this value. But something that has changed with technological advancement is the possibility of defining values like this.
For that, We call this metric Lifetime Value (LTV). If you don't already know it, the time has come to change that, because this is an extremely important metric for a company and can help you take new steps towards the evolution of your business.
With that in mind, we prepared this complete article to help you. Continue reading and answer all your questions about the subject!
What is Lifetime Value (LVT)?
As we saw previously, Lifetime Value is one of a company's main metrics. When we think about the epicenter of a business, the customer will always be the highlight. After all, a product or service must meet someone’s needs.
In free translation, “lifetime value” means “lifetime value”, and indicates all the net profit that a customer can generate during the period of relationship they establish with your company. Thus, becoming an essential metric, especially when we think about planning that requires this type of predictability.
But how does this work?
Imagine that one of your customers, over a period of 1 year, made four purchases with different values in each of them, and did not do business again:
- R$100,00
- R$125,00
- R$150,00
- R$85,00
In this way, the lifetime value of this customer can be calculated as the sum of the amount spent, that is, R$460,00. However, the idea of this metric is not to calculate it for each of your customers, but rather an average for you to plan.
Why is this metric so important?
In general, understanding the metrics that may affect your business is a way to prepare for all possibilities for your company. This way, you have a broad view of opportunities and can respond to them quickly, to take advantage of all the advantages that this can provide.
Right away, you already realize how important lifetime value analysis is for your business. After all, this is information that generates a new perspective for investment actions, for example. But, there are other topics where this metric can influence. Among them, we can mention:
- Assertive budgets for the marketing sector;
- No surprises with your company’s revenue;
- Identify, within the purchasing process, failures that may prevent the sale from being completed;
- Improves acquisition and retention, taking advantage of opportunities that were not well used;
- Among other aspects within your marketing and sales.
In this way, lifetime value becomes a very important metric so that you do not make decisions in the dark. In other words, without the perspective of the results that an action can bring to your company.
How to calculate lifetime value and what indicators to observe?
In practice, calculating this metric can be simpler than it seems. After all, in this process you can still pay extra attention to other KPIs that, without a shadow of a doubt, are essential both for the calculation and for your company.
As we saw previously, lifetime value is a metric that is based on some averages for your company. Therefore, to define it, you will need to use the formula:
LVT = (average ticket × average purchases per customer each year) × average relationship length
To understand better, imagine that your customers hire a service from your company in which, monthly, they will pay an average of R$500,00. Therefore, the average number of annual transactions would be 12. Furthermore, we can say that the relationship lasts for an average period of 2 years.
Thus, we would have the following result:
LTV = (500 x 12) x 2
LTV = 6000 x 2
LTV = 12000
In this example, your customers would have a lifetime value of R$12.000,00. In other words, this is the average of everything he can generate for your company, in the average time he will maintain the relationship active. Likewise, this period could be longer or shorter, but it is important to remember that it must match the reality of your business.
In the process of defining LTV, you need to pay attention to some metrics. We have listed some to help you with this step. Check out!
Churn rate
Churn Rate is a metric that can scare the unwary, after all, it is used to define the cancellations of your product or service each month. However, as we mentioned before, it is necessary to have a greater perspective on the business and prepare for all possibilities.
When thinking about the length of a contract, it is crucial to define its average duration, and this must be done in isolation, not just due to the LTV calculation.
Customer Acquisition Cost (CAC)
One of the most important metrics to compare with the lifetime value of your customers, CAC is where we define the amount spent by your marketing and sales team to close each contract in your company.
Average ticket
As we saw previously, the average ticket is an essential metric for calculating LTV. This is because it represents the average value generated by each of the sales made by your company. But, like the previous ones, it is also essential that you analyze this data in isolation.
This is because this is a metric that can define different paths and help you put together strategies that help you improve your sales and marketing processes.
So, what did you think of the tips? Are you able to define your company’s lifetime value on your own?
We hope you enjoyed this information. Now, the time has come to get your hands dirty! If you want other tips like this, we have one more for you. In our blog you will find all the details you need to enhance your strategies and achieve increasingly better results!
