How To Calculate The LTV (Lifetime Customer Value)

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How much profit do you make per customer? Do you know that number? If not, we need to make sure that you have a good sense for what your LTV (lifetime customer value) is so that you can have a sense of how much to spend in order to acquire each customer.

Keep in mind that even though there is a real formula to calculate the LTV, a real challenge is that market conditions and future trends and competitive landscape changes will cause the variables you use in your LTV calculation to have some inaccuracy. A degree of inaccuracy is almost unavoidable when calculating the customer lifetime value. Nevertheless, you must at least have a very good approximation of how much profit you make per customer because it is key to many other business strategy decisions. One example is being able to do paid marketing. If you know the value you get from each customer, you know how much you can pay for your marketing in order to bring in each customer. But if you don’t know how much money you make per customer, it isn’t possible to know whether your paid marketing efforts are justified.

Customer Lifetime Forumla

The formula to calculate your customer lifetime value goes as follows. The customer lifetime value equals the average monthly profit from each customer multiplied by the profit margin, and then divided by the churn rate.

The formula can be more complex if discounts are involved because that would have an impact on the profit margin, and the profit margin would be a variable that would need to be calculated on its own. Similarly, any of the variables used in this calculation tends to fluctuate. One such variable is your cost to market to those clients. Here is an article explaining just how varied marketing costs can be.

Strategies To Maximize Your Lifetime Customer Value (LTV)

However tricky it may be to calculate the precise customer lifetime value, one thing is certain. As business owners, we need to do whatever we can to increase our customer lifetime value. Let’s discuss some tips and strategies for how to increase your LTV.

The first thing to do is to collect the contact information of your customers. That way you can reach out to them with special offers, discounts, and much more. Regularly reminding people of your business increases your LTV because it helps people to simply not forget about your business. You will be surprised, but many people simply forget that your business even exists because they are busy, or are bombarded my marketing messages from other businesses. If you simply remind your customers of your business, it can go a long way to immediately increasing your customer lifetime value.

Once you are able to remind people about your business on a regular basis, you want to offer services or product lines that people can consume on a regular basis. A consistent consumption pattern lends itself well to a subscription that you can offer. Subscriptions are great if you are a business owner because they give you a steady and growing revenue base each month. Here is an article with more insight about how to grow revenue with the subscription revenue model. If you are skeptical about the subscription revenue model, think about how gyms make money. People often have gym subscriptions for years, even after they stop going to the gym. People often just don’t unsubscribe because unsubscribing requires a real effort and time. Plus, people often don’t unsubscribe because they think that one day they will get back to whatever they are subscribing to. And while they are thinking about it, your business keeps collecting the subscription revenue.

If you can’t get the subscription revenue model working well for you, the next best thing is to offer products that are consumed on a regular basis. Even though your customers won’t be signing a contract for a subscription, they will still be compelled to go back to buy from your business simply because they will need to consume the product you are offering. One terrible example of this is selling cigarets. Cigaret addicts regularly go back to buy cigarets because they need it. There is no subscription necessary. If you can addict people to your business, you will be able to get them to spend substantial money with your business.

More Business Resources

If you feel that you may need to learn more about increasing your LTV feel welcome to hire me as your business coach.

Additionally, I created a number of resources to help you with your business strategy and growth. If you like learning by reading, you may be interested in taking my business plan course or my business plan apps. I also wrote a book on starting a business which may be interesting if your business is at early or planning stages of starting. Here is the book that goes over going from a business idea to a full business and here is that same business idea book on Amazon.

Author: Alex Genadinik

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