Lifetime Value (LTV) is a metric used in business to estimate the average revenue that a customer will generate throughout their lifespan as a customer. It is a critical metric for a company trying to gauge the cost efficiency of acquiring new customers and supporting them over time. LTV is calculated by finding out the average churn and average spend of a user over the course of a specific period to predict their overall spend in an app. By calculating LTV, businesses can get a better idea of how much each new customer will add to their overall revenue and how much they can justify spending on customer acquisition. LTV is a key variable in revenue forecasting, as each additional customer brings additional revenue per month and throughout their projected ‘lifetime’ .
LTV is used to determine the marketing budget of a company. Adding LTV segments to customer personas will help businesses get a better view of the importance of each customer. Specifically, the Customer Acquisition Cost (CAC), the cost of acquiring one new customer, for each segment should always be lower than the Lifetime Value of a new customer. Once businesses are able to segment their customers according to their LTV, they can allocate more resources towards both the acquisition and maintenance of certain customers. Customers with a high LTV should receive more resources depending on what stage of the customer lifecycle they are in, especially if they are nearing the end of the cycle with potential for renewal.
LTV is more important than other metrics like Average Revenue Per User (ARPU) because it takes into account the length of time a customer will remain loyal to a business. Knowing the LTV of customers can provide valuable insights to help businesses run more effectively and profitably. For example, it tells businesses if they are connecting with their market, when a customer will become profitable, and which customers are profitable and which are not.
In summary, LTV is a metric that estimates the average revenue that a customer will generate throughout their lifespan as a customer. It is used to determine the marketing budget of a company, allocate resources towards both the acquisition and maintenance of certain customers, and identify which customers are profitable and which are not.
