There are those that are immediately familiar such as CPA (cost-per-action) and CPC (cost-per-click) but the one that isn’t brought up as often is LTV (lifetime-value).
Consider the following:
- You sell a $1,000 product to a customer yet never seem them come through again
- You sell a $10 product but they’re back there every week
Both of these give you a lifetime value.
For the first individual this is easy to calculate because it’s been just one sale of $1,000. Minus the cost of the cost-per-acquisition and you’ve got your number. The other individual, though, is hard to define because the longer they come back the higher their LTV.
From an article on TurnClick.com:
Roughly defined, LTV is the projected revenue that a customer will generate during their lifetime. Customer behavior changes over time and these gradual changes are known as the customer life cycle. It can be an absolute calculation over a customer’s life or relative calculation using a customer’s life cycle. For example, if a customer buys a product for two years and then doesn’t for at least one year then the life cycle of that customer is generally considered 2 years.
Let’s say you do have a customer with:
- An average, monthly lifecycle
- An average purchase of $100
- An average cost-per-acquisition of $20
In this simplest of sense you can figure you will turn a profit of $80 a month from this individual. Throughout the year this becomes $960 and if they stay around for 10 years they will bring the company around $9600.
When you understand the LTV you are able to refine efforts in many different, beneficial ways:
- You are able to refine your marketing strategy to reach short/long-term customers based on their LTV chances
- You are able to shift your sales pitch per group
- You are able to shape your customer service based on the expectancy of the LTV
In all, knowing the LTV can help you identify methods to score quick, easy sales with those that may not stick around while nurturing those that do so make sure this acronym is part of your vocabulary.