WHAT IS LTV: WHY KNOW IT AND INCREASE IT
Lifetime Value is the “lifetime value of the customer”. Simply put, how much profit one customer will bring to the business during the entire time of interaction with him.
For example, client X bought a toy for a child for the New Year, the income of which amounted to $ 50; in the summer I bought a swing with your margin of $ 125, and a year later – a hammock with a profit for you of $ 15. You spent $ 33 to attract this customer through advertising.
Thus, together his LTV was: 50 + 125 + 15 – 33 = $ 157.
Why businesses need to know this figure
According to the co-founder of the Internet marketing agency Site24, from a business point of view, this is a more useful indicator than simple metrics, such as ROMI (Return On Marketing Investment) or CAC (customer acquisition cost), as it takes into account the most profitable and “interesting” part – re-sales.
If you use this metric as an “indicator of service quality” and work to improve it, the business can grow significantly. But that’s not all.
In the realities of today’s market and competition, the cost of attracting a customer may be equal to or even exceed the profit received from him.
The third beneficial effect of LTV is the improvement of marketing. “In one of the projects, we calculated that the” cheapest “cost of the client is obtained from contextual advertising, but these clients make repeated appeals only in 20% of cases. And from the SEO-channel, at a more expensive “client cost”, we have more than 60% of repeat requests. Since the service that customers receive is completely identical, we concluded that the SEO channel is more profitable for business in the global perspective, “.
You can further complicate the analysis and analyze the entry points to the site from different channels, calculate ROMI and LTV separately for different services. Then you will get both a more complete picture of efficiency, and practically ready strategy of business development.
How to calculate LTV
On the one hand, to make a miscalculation of LTV is quite simple: from the total profit of one client you need to subtract the cost of its involvement. This is in theory. In practice, it is convenient to use the following formula:
- LTV = Lifetime x AOV x RPR, where
- Lifetime – the duration of interaction with the client
- AOV (Average Order Value) – the average check
- RPR (Repeat Purchase Rates) – the frequency of repeat purchases.
“Even the definition of these indicators needed to calculate LTV is already a good” training “for business, able to reveal weaknesses and give impetus to improvement,” – said the marketing expert.
How to increase LTV
LTV is affected by the same indicators as re-sales:
- experience of the first purchase / receipt of the service;
- maintaining further contact with the client, being in a single information field with him;
- availability of loyalty programs for repeat purchases;
- experience of the second purchase, the third and so on.
“Useful tactics for this purpose – the selection of different segments of the customer audience: one-time,” shimmering “, regular and VIP. Under each segment a completely different system of work on return and maintenance is built. The main task: to find your “ideal buyer”. That is, the segment that is most profitable and loyal to pay more attention to it, thereby increasing its profits, “says Zolotareva.
Ways to increase LTV:
- loyalty system. These are any bonus and discount programs that you offer to existing customers. From discounts on holidays to personal bonus cards;
- SMM and e-mail mailings. In this case, these channels are combined, because they solve the same problem – being in the information field of the client. This is the provision of interesting and useful information, all promotions, offers, updates of the range;
- individual proposals and consultations. You can provide a person with any useful information based on the data you have. Advise on the nuances of using the product, remind about the need to replenish the account, offer personal discounts on the products he buys. But for it to work in a plus and not cause irritation, the information really should be useful, and participation – human, without the task to “steam”;
- retargeting. You can customize your ads to current customers, but make sure you show them a different product in your ad than the one they just bought from you.
“But you should not focus only on VIPs. One-time customers can be an invaluable source of information about the “weak areas” of your business, the correction of which will lead to an explosive growth of LTV, and ultimately turnover and profit, “- advises the expert.
Which is better for business: higher margin or longer LTV
There is no clear answer here, it all depends on the current business model, product and strategy.
- When selling expensive goods that are bought “once in a lifetime” (yachts, apartments, chandeliers, sophisticated medicine) we need a high ROMI first purchase.
- In crisis situations, when it is important to “catch up to the new year”, otherwise the business will close, we also focus on high margins.
- In the goods and services of “permanent use” – retail, beauty industry, medicines – in the first place should focus on increasing LTV.
- In any business that has the potential to resell, possibly, products from different categories and that has a planning horizon of more than a year – all this is a story about the priority of LTV metrics.