LTV Lifetime Value of Customer
LTV stands for the Lifetime Value of the Customer
A very simple way to calculate LTV is:
1. Take the average spend amount of a customer per visit
2. Multiply that by the frequency of payment
3. Multiplied by the average length of time a customer buys from you regularly
Example 1 The Coffee House (totally fictional) in this example we'll average 5 customers
Step 1 - average spend per customer per visit customer 1 = $3.50 customer 2 = $8.50 customer 3 = $5.00 customer 4 = $6.50 customer 5 = $6.00 Total= $29.50 / 5 customers = average $5.90
Step 2 Find the Frequency of Visit (per week) customer 1 = 4 customer 2 = 3 customer 3 = 5 customer 4 = 6 customer 5 = 3 Total = 21 / 5 customer = average 4.2
Now calculate Cost per Visit * frequency
Average spend $5.90 * Average number of visits per week 4.2 = weekly value $24.30
Once The Coffee House has acquired a customer let's say they are regular patrons for 2 years before they go on a health kick and stop drinking coffee.
That means $24.30 per week for 104 weeks = $2527.20 is the average value of a customer for The Coffee House - this is the Simple LTV, but not one you should use to calculate marketing
If we want to know how much money we really make, we need to include the profit margin. Let's say the Coffee House has an overall profit margin of 21.3% -this means that over the course of the year, when all the income and expenditures are calculated, at the end this is the percentage of money we made .. this is caclulated as the profit divided by the gross income.
now we multiply $2527.20 * 21.3% to determine the actual profit the average customer brings in: $538
Example 2 - The Membership Site (totally fictional)
Average customer subscription is $47/month
Average length of subscription is 18 months
LTV = $47 * 18 = $846 is the average value for a customer to The Membership Site
Let's say their overhead is low, just servers really - so their profit is 84%
now we mulitplyy $846 by 84% = $710
Think about what this means from a marketing perspecitve. Now The Coffee Shop can afford to spen $200 to acquire a new patron and they will still make an average of $338 on that patron over the course of the next 2 years. This can seem completely contrary when you see the average spend is less that $6
Similarly, The Membership site can easily afford to spend $200 to acquire a new member and still make well over $500 on each of those members.