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ProfitWell Lifetime Value

Lifetime Value (LTV) measures the total revenue a customer will bring to a business over their entire lifespan as a customer.

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Lifetime Value $69,915 Start tracking this metric
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What is Lifetime Value?

Lifetime Value (LTV) is a critical metric in marketing and sales that represents the total net profit a customer is expected to generate for a business over the entire duration of their relationship. It quantifies the long-term value of a customer to the company and helps businesses understand the long-term value of each customer, making it easier to create effective marketing strategies, optimize pricing, and allocate resources in areas that will generate the greatest return on investment.

LTV takes into account various factors, including the average purchase value, the frequency of purchases, the customer retention rate, and the operational costs associated with serving the customer.

How to Calculate Lifetime Value?

By calculating LTV, businesses can determine how much they can invest in acquiring new customers and retaining existing ones while remaining profitable.

The basic formula for calculating Lifetime Value (LTV) focuses on three primary inputs: Average Revenue Per User (ARPU), Gross Margin, and Churn Rate.

The formula looks like this: ARPU x Gross Margin / Churn

Let’s consider an e-commerce business that sells beauty products online. Over the past year, they collected data on their customer base and want to calculate the LTV to understand the value of their customers over time.

To calculate ARPU, divide the total revenue generated by the number of customers over the given time period, for example: $500,000 in total revenue from 10,000 unique customers.

ARPU = Total Revenue / Number of Customers
ARPU = $500,000 / 10,000 = $50

Determine gross margin, by calculating the difference between net sales revenue and the cost of revenue, showing the profit margin of the business. For instance, if net sales revenue is $400,000, and the cost of revenue is $150,000:

Gross Margin = Net Sales Revenue – Cost of Revenue
Gross Margin = $400,000 – $150,000 = $250,000

Calculate the churn rate, the percentage of customers who stopped using the product or service during the given period: say it’s 20% during the year.

Churn Rate = 20%

Now, using the inputs we have, we can calculate the LTV for this e-commerce business.
LTV = (ARPU x Gross Margin) / Churn Rate
LTV = ($50 x $250,000) / 20%
LTV = $12,500

In this example, the calculated Lifetime Value (LTV) for the e-commerce business is $12,500. This means that, on average, each customer is expected to generate $12,500 in net profit over their lifetime as a customer.

What is a Good Lifetime Value?

A good Lifetime Value varies depending on the industry, location, business model, target audience, and other factors.

Generally, a higher LTV is desirable as it indicates that customers bring in more revenue over their lifetime, allowing businesses to recover customer acquisition costs and achieve profitability sooner. A “good” LTV depends on factors such as the average cost of customer acquisition and the company’s profit margins.

Here are some recent benchmarks from US-based companies:

  • Business Consulting: $136,959
  • Digital Design: $21,864
  • Financial Advisory: $45,976
  • Medical Billing: $26,932
  • Architecture: $135,480
  • Software Development: $69,915

LTV is often considered in relation to Customer Acquisition Cost (CAC). According to some online resources, a 3:1 ratio is considered good.

Keep up with future trends and instantly compare your performance to companies just like yours, regardless of your industry. Join our Benchmark Groups—it’s anonymous and free for everyone!

How to Improve Lifetime Value?

Let’s go over some effective strategies to enhance LTV:

  • Divide customers into segments based on their behavior, preferences, and spending habits. Tailor marketing efforts to meet the unique needs of each segment and create personalized experiences, especially in email marketing.
  • Implement customer loyalty programs that reward customers for repeat purchases. Offer exclusive discounts, rewards points, gifts, or VIP status to incentivize customers to continue doing business with your brand.
  • Recommend additional products or services that complement customers’ previous purchases. Strategic upselling encourages customers to buy a higher-tier version of a product, but at the right time, while cross-selling suggests related products they might be interested in.
  • Provide exceptional customer service to enhance customer satisfaction and loyalty. Address customer inquiries and issues promptly and ensure a positive post-purchase experience. Regularly check in with your customers even if they’re not expressing any concerns about your service or product, and remind them why they’ve chosen you.
  • Teach users how to use your product or service to help them get more value. Educate your customers about all the features of your product or service to make sure they’re fully leveraging them, even if they signed with you for one specific thing.
  • Encourage satisfied customers to refer new customers to your business. Word-of-mouth referrals can attract high-quality leads and contribute to customer retention.

More resources to help you improve:

Visualizations

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    Pie Chart

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    Bar and Line Chart

    Used to show comparisons between values.

How to track Lifetime Value in Databox?

Databox is a business analytics software that allows you to track and visualize your most important metrics from any data source in one centralized platform.

To track Lifetime Value using Databox, follow these steps:

  1. 1
    Connect ProfitWell that contains the metric you want to track
  2. 2
    Select the metric you want to track from the list of available metrics
  3. 3
    Drag and drop the selected metric onto your dashboard
  4. 4
    Watch your dashboard populate in seconds
  5. 5
    Put Lifetime Value on the Performance screen
  6. 6
    Get Lifetime Value performance daily with Scorecards or as a weekly digest
  7. 7
    Set Goals to track and improve performance of Lifetime Value
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ProfitWell Lifetime Value included in Dashboard Templates 1

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Basics

  • Description
    Lifetime Value (LTV) measures the total revenue a customer will bring to a business over their entire lifespan as a customer.
  • Category
    SaaS
  • Subcategory
    LTV
  • Default Format
    PrefixCurrency
  • Cumulative Support
    Yes
  • Units
    Yes
  • Granularities
    monthly
  • Favorable Trend
    increasing
  • Historical Data
    Yes
  • Changing historical data
    No
  • Forecast Support
    Yes
  • Benchmark Support
    Yes
  • Media Support
    No
  • Dimension
    N/A
  • Metric Type
    general Learn more
  • API Endpoint
    https://api.profitwell.com/v2/metrics/{period}

Questions? We've got answers.

  • What is the Difference Between CLV and LTV?

    Customer Lifetime Value (CLV) and Lifetime Value (LTV) are often used interchangeably, but there can be slight variations in their definitions. CLV typically focuses on the individual customer level, while LTV may refer to the aggregate value of all customers as a whole. The underlying concept remains the same, measuring the total value a customer brings to a business over their lifetime.

  • Is LTV a Measure of Profit or Revenue?

    LTV is a measure of profit, not revenue. It takes into account the cost of acquiring and serving customers, making it a more accurate indicator of a customer’s value to the business.

  • Can CLV be Negative?

    Yes, CLV can be negative, in cases where the cost of acquiring and serving a customer outweighs the revenue generated from that customer. A negative CLV indicates that the customer relationship is not profitable and may require further analysis and improvement strategies.

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