Lots of small business owners want more web traffic, leads, sales. But few have an answer to the essential question of every online marketer: “What is the lifetime value of your customers?”
If you pay for SEO or online ads, you must know your customer lifetime value (LTV). That’s the only way to be sure that your marketing is effective.
What Is LTV?
LTV is the net profit you made from that customer over their entire buying cycle with your company, for example: a customer decides to pay you. You deliver the service or product, and there are certain costs involved such as materials to overheads like the staff, an accountant, etc. Maybe you sell the customer more stuff in the future. Or they subscribe with you and cancel after 2 years.
How To Measure LTV
Once you’ve gone through the life cycle with a few customers, you can make a rough estimate of “churn rate”. If you sell only one product, with no plan of ever doing business again, then the churn is one purchase. But most businesses have an upsell or subscription model. We don’t have to get bogged down into finding the exact LTV number. We’re just looking for a basic measure so you can get on with your marketing. Let’s take a simple example: a new web-based business selling an ongoing subscription.
Once the first customer cancels, the business can figure out a quick and dirty LTV:
- take the fees charged for the monthly subscription
- minus the costs to provide the monthly subscription
- multiply by the number of months the customer was subscribed
Obviously, this one customer doesn’t determine the average churn for all the customers and depending on the business, it may not be so easy to say the exact costs spent on serving this one customer. But this gives you a starting idea. Over time, as you churn through more customers, your data will get more precise.
For e-commerce sites, the LTV is often described as:
Average Order Value X Purchase Frequency X Average Lifespan
Once you learn how to calculate these figures, you’re off to the races.
Confident Online Marketing Is Backed By Clear Data
Whether you run your own marketing or hire a pro, you can see how LTV informs your decisions. It takes nerves of steel when getting a new customer costs more than the profit from their first purchase. But it’s the right move as long as cost of acquisition is less than LTV. And that data is essential when planning a budget for digital ad spend or SEO.