Figure LTV: concept, importance, methods of calculation

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2018-03-19 03:31:06

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The Objective of any business is profit. It is important not only that he brought a lot of money, you need to distribute them competently. For this reason, a systematic analysis of the effectiveness is an integral part of a successful business. One of the main indexes used by marketers is the indicator LTV.

ltv indicator

What is LTV

The LTV is an abbreviation, translated as "the customer lifecycle". This figure shows how much each buyer brings money to the company for all time of cooperation.

Usually used two ways of calculating this indicator.

  1. Historical, taking into account the total value of the income that particular customer brought to the company.
  2. Forecast needed to build a more complex behavioral patterns of the buyer. It takes into account what products (services) more interesting to the client, in what price range are their preferences, what is the frequency of purchases. On the basis of statistical data formed the prediction, allowing to predict its acquisition.

The Importance of LTV

For efficiency, business of great importance are regular customers. The cost of retention is lower than attracting new ones. Therefore, the customer lifecycle is longer, the more profitable the business.

marketing analysis

Calculation of this indicator allows to identify which methods of attracting buyers work most effectively. It allows you to abandon ineffective. And also gives you the opportunity to make a “customer”, that is what the age, gender, social status of the main customers. It is important to strive to increase the LTV compared to the cost to attract buyers.

It is necessary to analyze customers, bringing the most revenue. It allows you to determine which group of consumers they represent. Marketing analysis will help determine the optimal advertising channels and the correct presentation of information. In addition, will allow to review the range of products or services, getting rid of the use of minimum demand and adding those that interesting to regular customers. This will prolong their loyalty.

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Building a business centered on lifetime value, will provide a significant competitive advantage.

Simple formula

There are several methods to calculate LTV. The specific choice depends on the specifics of the business. To calculate using the most simple way to calculate need is a little information. Simplicity is its advantage. The disadvantage is getting only basic information. To calculate the index LTV, it is necessary to know what amount of income brought to the company by a particular customer during the cooperation. In addition, you need to know how much the company spent to this buyer kept their loyalty.

lifetime value

With these data, calculate the LTV will not be difficult. In this case it is equal to the difference between income and expense.

The basic formula of calculation

It relies on averages. Since the coefficient of the error of applying this formula, it is recommended that to apply it segmentierung. That is, it can be used when conducting a market analysis of various products.

In this case, LTV – derived three indicators: average sales price, average number of sales per month and average number of months of maintaining customer loyalty.

customer lifecycle

LTV ratio outflow

This method of calculating the indicator is used in business related to sales of software products.

In order to calculate the churn rate of customers, you need total number of customers who have left during the month divided by the number of buyers who made a payment last month, and multiplied by 100.

Calculate the churn ratio, you can calculate LTV from his account.

To do this, the average monthly income of the buyer should be divided into the already known ratio of the outflow.

If the churn rate is 5%, this means that each buyer retains their loyalty for 20 months. Then he ceases to be a client of the company. If the average monthly revenue per customer is 100 rubles, the average revenue per customer will be 2000 RUB (RUB 100 X 20 months).

Having data on average number of customers, ceased to be, and the value of the average check, it is possible to calculate the index, the average lifetime value of a customer to a particular business.

If the amount that is spent on attracting customers, it equals or exceeds the value that it brings, such a business is not successful. You need to bring in change, whereby the cost of attracting the buyer should be reduced, and the lifetime value will increase. Thus, you need to think about maintaining customer loyalty of the company for as long as possible.

LTV and email newsletter

Sending emails is a great way of increasing LTV. Simple advertising information will not be perceived by users and, most likely, this letter will be deleted. Therefore, you should use some tricks. For example, most valuable customers with a high level LTV you can send a promo code that will allow you to get a good discount on your next purchase. Those who spend less money, you can give a modest discount.

The Distribution must be adjusted depending on term customer loyalty. At first, it is more likely to introduce new products and promotions. Those who remains faithful for more than a year, you should send letters less and with the most valuable for this category of buyers.

index ltv

It is Necessary to offer to purchase related products and accessories. A selection of recommended products can be sent by e-mail after a customer bought something.

Companies that sell programs, access to movies, books and music, increasingly offer a subscription that can be purchased on a user selected period. A subscription service allows you to improve the performance of the LTV.

To Keep customers is always easier and cheaper than attracting a new one. Therefore, it is important to follow the lifecycle.

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Alin Trodden - author of the article, editor
"Hi, I'm Alin Trodden. I write texts, read books, and look for impressions. And I'm not bad at telling you about it. I am always happy to participate in interesting projects."

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