Customer LTV, also known as lifetime value, is a metric that tracks the total value of a customer over time. It considers all of customer’s repeated orders, generating a number that reflects their value to your company.
Once you know your average customer LTV, you open yourself up to a whole host of opportunities. Let’s take a look at how calculating customer lifetime value can help grow your business.
What insights does calculating your customer LTV give you into your business?
Once you calculate your customer lifetime value, you’ll then be able to use this figure as a springboard towards progress. There are five critical ways in which you can use the customer LTV figure:
- Working out where to best invest your resources.
- Using Verfacto to find out which user segment has the highest LTV.
- Finding your most profitable customers and create campaigns directed at them.
- Using individual customer LTV to handle complaints.
- Tracing LTV as a benchmark to track your progress.
Let’s break these down even further.
Using customer LTV to see where you should invest your time
Economist Vilfredo Pareto once said that 20% of effort results in 80% of the results. While he was referring to pea pods in his garden, we can still apply this approach to e-commerce.
When calculating your customer lifetime value, you’ll be looking at three factors that lead to the final figure:
- Your customer lifespan
- A customer’s purchase frequency
- The average order value on your website
Calculating your LTV with these variables will put into perspective where your business is excelling and where it could use a little refinement.
For example, if you have a high average order value, but a low customer lifespan, you should focus on improving customer retention.
Alternatively, suppose customers frequently purchase from your website, but have a low average order value. In that case, you should introduce some higher priced items to your store.
Working out your LTV will expose exactly which of these other three metrics is the weakest on your site. You can then focus on whichever factor is falling behind, boosting your customer LTV and overall revenue by directly targeting your weak spots.
Use your customer LTV to single out your most profitable customers and acquisition channels
By using Verfacto’s customer segmentation software, you’ll be able to compare customer lifetime value for each segment. By running a customer profitability analysis and placing different groups side by side, you’ll be able to see precisely which user demographics are your most profitable customers.
You’ll also be able to see where exactly your most profitable customers are coming from. By comparing different acquisition channels, you can see which sources are the most valuable for your business.
With this knowledge, you can focus on a more significant percentage of your marketing budget for channels that produce customers with a higher LTV.
Similarly, you can also copy the demographic of your user segment with the highest customer LTV into a marketing campaign and target them directly.
By directly targeting users that you know will have a larger lifetime value, you’ll be boosting profit, increasing your average total LTV, and improving your engagement in marketing campaigns.
Individual customer LTV can help with managing customer complaints
No matter how fantastic your business is, there will always be customers that complain. How you react to those complaints can often lead to you giving away discounts, refunds, or complimentary products, all of which count as a loss for your business.
However, by calculating the individual LTV of a customer when they complain, you can get an insight into how valuable that particular customer is to your business.
Let’s say we have two complaints, one from customer X with a LTV of $600 and one from customer Y with a LTV of $40.
By knowing their individual customer LTVs, we instantly see that it’ll be worth losing some money to keep customer X, while it may be better to focus fewer resources on customer Y.
Customer LTV sets a benchmark for progress on your e-commerce store
That which isn’t measured isn’t improved upon.
If you don’t have ways of tracking your store’s growth, you won’t know whether your business is heading in the right direction.
Customer lifetime value is a critical metric to follow when tracing the ongoing progress of your store. Not only does an increasing customer LTV signal a healthy and profitable business, but it also demonstrates that customers are satisfied with your e-commerce website.
How exactly does customer lifetime value link to customer satisfaction? As customer LTV is a metric that tracks purchases over time, increasing up when repeat customers buy multiple times, a high LTV suggests that customers are constantly returning.
Within the idea of LTV is a sense of loyalty. If your store has a high customer LTV, it’s a strong indicator that you have a large client base of repeat customers.
By tracking your customer lifetime value, you’ll be able to ensure that your business is continually growing. If your LTV is receding, it’s time to make some changes.
Tracking Customer LTV Keeps Your Priorities Straight
Did you know that it’s roughly 5x as expensive to acquire a new customer than to keep an old one? Facts like these are why tracking your customer LTV is so important.
If you don’t have many repeat customers, your customer lifetime value will suffer. By using Verfacto tools, you’ll be able to trace where customers are leaving your site. By fixing these issues, you’ll then be able to track your LTV to see if you’ve fixed the heart of the problem.
If you focus on improving your customer lifetime value, then you’re working towards the success of your business.
Not sure how to grow your customer LTV? Check out our article on 5 effective ways to increase your customer lifetime value.
Final Thoughts
Customer lifetime value is a metric that marketing managers sometimes underestimate. Don’t fall into that trap.
By calculating your customer LTV, you’ll receive critical data that can help you monitor your business. It prioritizes different aspects to trigger growth, and gives insights about the demographic of your ideal customer.
Do you want an individual breakdown of each user segments’ LTV, as well as a customer LTV predictor function? Click here to get Verfacto’s one-month trial.
