Unfortunately, those numbers can quickly start to run together. When you have so much to track and analyze, it can become difficult to know exactly what they’re telling you. You can waste a lot of time monitoring analytics without learning much.
Instead of trying to track it all, I’ve found that focusing on just a few key metrics can help you understand how your marketing is performing. One of my favorites is lifetime value (LTV). The lifetime value of a customer is the amount of money a customer contributes over their entire life as a customer.
Let’s take a look at why LTV is so important for your business, how you can find it and how it should influence your marketing and business decisions.
Why Lifetime Value Is So Important
Let’s start with what happens when you create a marketing campaign.
With each ad, post or piece of content, you’re hoping to see a return on your initial marketing investment. However, you’re also hoping to attract some high-quality customers or clients who will buy again and again. While you can measure your cost per lead and retention rates, they don’t tell you much about how long those customers are sticking around or what they’re buying.
This is where lifetime value comes in. Not only does a customer’s lifetime value let you know that they’ve converted, but it can also help you calculate a long-term return on investment. LTV goes beyond just one campaign so you can assess how your marketing is doing at gaining and retaining long-term buyers.
Knowing your customer lifetime value also allows you to see who your loyal base includes. By identifying your repeat shoppers who come back to your brand time and time again, you know who to target for referral campaigns or other loyalty-based programs.
Calculating Your Customer’s LTV
To find your customer LTV, you first need to identify the average value of an order or purchase. Then, average how many times a customer makes a purchase each year. Multiply these numbers together to find your average customer’s yearly value.
Next, determine how long a customer typically stays a customer in years. Multiply this number by the customer’s yearly value. Your final product will be your customer lifetime value.
How To Use Your Customer LTV Strategically
Knowing your LTV can help you make smarter decisions about where to invest your marketing and sales budgets. By understanding how long your customers or clients can expect to stick around and how much they’re likely to spend, you can make smarter decisions to impact your bottom line.
First, use LTV as a benchmark. By calculating LTV consistently, you can see if customers are spending more, sticking around longer or purchasing more frequently.
You can also implement strategies to try to boost one of the metrics encompassed in LTV, which can boost the overall value. For example, by increasing your average order cost, you can improve LTV over time.
The LTV equation can even be applied to specific marketing channels. By determining your LTV for search, email, ads or social, you can find your most profitable channels. You are then able to allocate your marketing budget where it brings the highest returns.
Finally, LTV can be used at an individual level to get specific information about certain customers. By calculating an individual’s unique LTV, you can see which customers deserve more of your attention.
Using Customer LTV To Grow Your Business
There are a lot of metrics you need to understand to grow your business. However, understanding the lifetime value of both your average and individual customers can help you make smarter decisions to bring better returns on your investments.
Calculate your LTV consistently and look for shifts that may tell you if your marketing is moving in the right direction. By approaching your return on investment with a long-term mindset, you can create more repeat clients and build a loyal customer base.
