Lifetime Value (LTV): What it is and how to optimise it

Lifetime Value (LTV) is an essential metric for planning your company’s sales, marketing and service planning. But what exactly does it measure?

LTV aims to quantify how much a customer is worth to your business over time. This is a complex calculation, as every customer brings unique value differently.

Understanding the profit potential of your customers is essential. This information guides sales, marketing and service strategies, making them more assertive and sustainable.

In the digital age, tools like ERP and CRM provide data for this estimation. The calculation produces the key performance indicator (KPI) we will discuss here: Customer Lifetime Value or simply Lifetime Value (LTV).

READ ALSO: 9 Sales KPIs Every Sales Team Should Be Tracking

In this article, you’ll learn exactly what LTV is and explore questions such as:

• Why calculate LTV?
• How to calculate LTV?
• LTV, CAC and Churn Rate: What is the relationship?
• How to optimise your LTV?

Want to create even more complete business reports? Keep reading and check it out!

Lifetime Value (LTV): What is it?

In Portuguese, ‘lifetime value’ is often translated as ‘valour vitalício do cliente’. As the term suggests, LTV (Lifetime Value) projects the total revenue a customer can generate for a company throughout their entire relationship, from their first purchase to their last interaction.

Why calculate LTV?

Customers may eventually reduce their transactions or switch to competitors at some point. To mitigate potential losses, companies implement after-sales strategies that focus on building relationships and increasing customer retention.

However, developing these strategies requires knowledge of your customer base and your business. Even so, not even the largest companies in the world retain 100% of their customers. Therefore, it is necessary to prioritise those customers who are most aligned with your proposal and have the greatest potential for purchasing and upselling.

This is where LTV comes in. With this indicator, your team can delve deeper into the return on investment (ROI) analysis and understand which customers generate the most value in the long term. This helps you make strategic decisions regarding customer acquisition and service (which audiences to target and which channels to strengthen, among other issues).

Several studies show that converting new customers is up to 25 times more expensive than retaining existing ones. In sales and marketing, therefore, LTV helps define budgets and segment campaigns, identifying the brand’s most loyal customers. This increases the chances of generating profit quickly and ensuring revenue in times of crisis.

In short, tracking LTV makes it easier for your business to :

• Check whether returning customers offset acquisition costs.

• Project revenue in the medium and long term.

• Set viable budgets for customer acquisition and retention.

• Identify opportunities to attract and retain customers, as well as improve service.

• Determine, based on data, the strategic focus on growth ( prospecting ) or relationships (retention).

How to calculate LTV?

The LTV calculation triggers three other indicators:

1. Average Ticket: average value of conversions generated in a given period.
2. Customer Acquisition Cost (CAC): amount invested in converting each customer in the period.
3. Abandonment or Cancellation Rate ( Churn Rate ): percentage of customers lost during the period.

In general, the most used formula is:

LTV ($) = (Average ticket [$] × Total or average purchases in the period) × Average relationship time (in years or months)

To visualise this diagram, imagine that your company has a fashion e-commerce site in which customers spend around $500 per purchase. Customers make an average of 10 yearly purchases and maintain a relationship with the brand for around 2 years.

Applying the formula above, the LTV calculation would be:

LTV = (500 × 10) × 2

LTV = 5,000 × 2

LTV = 10,000

In this example, over the course of its life cycle, or LVT, the average customer of your e-commerce would generate around $10,000 in revenue.

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Now imagine that your business operates on the SaaS ( Software as a Service ) model, providing solutions for small businesses. Your average ticket is $4,000, and the services are paid monthly, semi-annually, or annually.

Considering the annual plan, the LTV would be calculated as follows:

LTV = 4,000 × 12 (total monthly payments, representing one purchase per month for 12 months)

LTV = 48,000

At the end of the period, the net profit generated by the contract would be $48,000. If the duration is less than one year, 12 must be replaced by the corresponding number of months.

LTV, CAC and Churn Rate: What is the relationship?

You’ve seen how the average ticket is used to calculate LTV: the higher the average conversion value, the higher the profit your base can generate. But how do CAC and churn rate influence LTV?

Customer Acquisition Cost, or CAC, is very important for LTV analysis. It signals investment in marketing and sales prospecting. When the CAC value is close to or greater than the LTV, your company is at a loss, investing too much in customers without recurrence.

Therefore, the guideline is to keep the CAC proportional to or lower than the LTV. You can compare the two indicators with this formula:

LTV ($) = (Average Ticket [$] × Average Relationship Time [in Years]) − CAC ($)

You can also measure LTV based on churn rate, which measures cart abandonment and contract cancellation. This is another way to evaluate your profit, as it compares the value of conversions generated to lost business. See below:

LTV ($) = Average ticket [$] / Total or average number of customers lost in the period

If the churn rate is high, the tendency is for your average ticket to decrease – after all, the fewer customers who buy, the less revenue is generated. This affects the Lifetime Value figure and shows that something is not motivating your customers to stay.

Do you see how CAC and churn rate can help to put LTV into perspective? These KPIs are essential in your sales report, as they assess customer satisfaction and fit with your company. By selling to the right people, you meet your audience’s needs and expectations, achieving better and more lasting results.

How to optimise your LTV?

You’ve done the maths and concluded that your LTV can be improved. Now, where do you start?

First, remember to contextualise your analysis. In addition to consumer habits, some factors can fluctuate LTV over time, such as market momentum, industry performance, and the added value of products and services.

That said, your goal should be to increase the value of conversions and customer retention time while decreasing the CAC and churn rate. Check out some tips below:

1. Automate relationship management

Lifetime Value projects future earnings based on historical data. With artificial intelligence, making these predictions right has become much more manageable.

Today, digital solutions such as CRM use advanced big data and analytics technologies. These tools record customer interactions across multiple channels, generating highly accurate reports.

In this way, in addition to automating routine tasks, the platforms provide insights into all stages of the sales funnel, helping your team to make daily improvements.

2. Perform a Cohort Analysis

We know that your customers are different from each other. So, doesn’t the LTV change depending on the profile analysed?

The answer is yes, and to determine these variations, a cohort analysis is performed. This technique “cuts” your customer base by approximation, outlining buyer personas according to specific criteria (location, age range, salary range, among others).

By segmenting the profiles you serve, you can study them separately and understand their purchasing behaviour over time. This feature is especially valid for companies with multiple product lines, or that aim to expand into new markets.

3. Define your ICP

The Ideal Customer Profile (ICP) is the Ideal Consumer Profile – that is, a customer avatar that is most aligned with your company’s proposal, solutions and objectives.

With a well-defined ICP, you attract more qualified leads with less chance of churn. When prospects identify with your offer, they tend to convert faster into customers and sustain the relationship.

To calculate the ICP, it is recommended that customers be ranked based on profitability. This way, marketing and sales teams can target campaigns to the audience that drives their average ticket.

4. Invest in content marketing

Connecting with the customer before, during, and after the sale depends on conversations. That’s why content marketing is essential for LTV—whether to rekindle your base or to win customers at the lowest cost.

When well-crafted, content is useful and relevant to customers and communicates your sales pitch, advancing the stages of the purchasing journey. Blogs, e-books, and landing pages are examples of platforms for this purpose. Tools such as email marketing also help to reconnect with distant contacts and keep customers up to date.

Investing in content doesn’t just mean producing texts to meet deadlines. The same goes for creating social media accounts, which aren’t effective if they’re not regularly updated. Instead, focus on planning a comprehensive strategy that generates quality content that is optimised for SEO and targeted campaigns.

READ ALSO: What is Lead Nurturing? Examples, Strategies, & Tips

5. Implement customer success cells

Customer success is the future of customer service today. Throughout the entire sales process, CS managers provide support and receive customer requests, working to ensure the best possible experience.

This makes it easy to understand how these teams boost your LTV. With professionals focused on improving the shopping experience, your company cultivates relationships from the first contact, delivering maximum efficiency and personalisation.

In addition to loyalty to the company, the consultant role played by the CS also encourages higher-value purchases, increasing the average ticket and your profit margin.

6. Have a loyalty program

A classic strategy for increasing customer value and lifetime value is implementing loyalty programs. These programs not only encourage repeat purchases but also strengthen emotional connections to the brand.

When creating or redesigning your loyalty program, consult your customers through satisfaction surveys. This can help you determine which rewards appeal most to your base and which partnerships interest your audience. Additionally, integrate your loyalty club into your content marketing strategy, using special occasions to ‘toast’ your customers.

Ready to optimise your LTV?

Delighting and retaining customers requires a series of coordinated actions and should be a company-wide goal. By working together, your teams can surprise and retain consumers for much longer, optimising and increasing the company’s LTV KPI.

If you found this content helpful, check out the other materials on our blog and the Salesforce Resource Centre! And don’t forget to check out Customer 360, our complete CRM solution for boosting sales through relationships. Thanks for reading!