Lifetime Value: Understanding The Metric That Drives All Marketing

1
Lifetime Value Understanding The Metric That
Drives All Marketing

2
Context

• Introduction
• Basics
• Lifetime Values Advantages over Cash In, Cash
  Out
• Calculating Lifetime Value
• Lifetime Value Analysis
• How much you can spend on acquiring a customer?

3
Introduction

• Customer Lifetime Value is an important metric or
  an estimate, which every business owners should
  be aware of.
• As it predicts the customers relationship with
  the business, you can determine the profit of
  your business.
• You can also determine the suitable marketing
  channels and its usage in a long run.
• This value will make changes in every part of the
  business.

4
Basics

• Lifetime Value (LTV) in simple terms is a guess
  which shows how much a person can spend on your
  products or services.
• LTV will be changing depending on time and the
  customers. Hence one cannot determine that the
  before value will continue for next years.
• With the help of Lifetime Value, you can conclude
  that
• - How much you can spend to gain a customer
• - The potential of the customer
• - How much you can earn from a single customer
  and much more

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Lifetime Values Advantages over Cash In, Cash Out

• In Cash In, Cash Out, you cannot determine the
  results at initial stage.
• For example, consider you are investing 45 in a
  customer and you get the desired profit only in
  the 4th month.
• In such cases, if you calculate the cash flow for
  only 2 months, then it obviously considered as a
  loss and you eventually give up with it. But it
  is a successful attempt, if you consider a
  lifecycle.

6
Calculating Lifetime Value

• Calculating the Lifetime Value is quite a
  difficult task, as the customers behaviours are
  hard to predict. But when you try to gather and
  figure out the customer data, it is relatively
  simple.
• Formula for calculating the Lifetime Value is
• Transaction Value x Number of Transactions x
  Profit Margin
• Or for subscription business
• Monthly Revenue x Number of Months x Profit
  Margin
• A Good Lifetime Value is the value that should be
  3 to 5 times more than the amount that you spent
  on acquiring that customer.

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Lifetime Value Analysis

• As the customers interest and behaviour changes
  over time, you Lifetime Value also changes over
  time. Cohorts allows you to analyse and measure
  these changes over time.
• Cohorts is the way of measuring the LTV in
  groups. Instead of measuring the value based on a
  single customer, cohorts allows you to group the
  customers based on the time.
• Using cohorts analysis you can derive
• - How much a customer likes to spend on your
  goods and services?
• - Are they spending less or more?
• - Is your marketing getting better?

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How much you can spend on acquiring a customer?

• Based on the rule, you can spend 35 of your
  calculated LTV to acquire a customer. Most
  important metric that you need to consider is the
  Payback Periods.
• You can also spend 100 of the Lifetime Value in
  acquiring a customer, but you need to put lot of
  efforts like branding, referrals and much more.
• Spending 100 of the value sometimes will not get
  you profits, but it gets you experience and
  feedbacks from the customer on the possible
  improvements.