We have startups, established companies, and even highly-analytics and sophisticated companies that come to us for assistance to grow their online business. Regardless of the size or sophistication, when we ask about their cost-per-acquisition and the lifetime value (LTV) of a customer, we're often met with a blank stare. Too many companies calculate budgets simplistically:
With this perspective, marketing winds up going into the expense column. But marketing isn't an expense like your rent… it's an investment that should be working to grow your business. You may be tempted to calculate that the cost to acquire a new customer is a certain dollar amount, and then the profit is the revenue you achieved on their purchase. The problem with that is that customers typically don't make a single purchase. Acquiring the customer is the difficult part, but a happy customer doesn't simply buy once and leave – they buy more and stay longer.
What is Customer Lifetime Value (CLV or CLTV) or Lifetime Value (LTV)?
Customer lifetime value (CLV or often CLTV), lifetime customer value (LCV), or life-time value (LTV) is the calculated profit that a customer will provide your company. LTV is not limited to a transaction or annual amount, it includes the profit achieved for the duration of your relationship with the customer.
What's the formula to calculate LTV?
- LTV = Lifetime Value
- ARPU = Average Revenue Per User. Revenue may come from the application cost, subscription-based revenue, in-app purchases, or advertising revenue.
- Churn = Percent of customer lost over a given period. Subscription-based applications often annualize their revenue, churn, and expenses.
If you're developing a mobile application, here's an infographic from Dot Com Infoway – Calculate the Life Time Value (LTV) of your App Users for Massive Branding & Success – that provides a walk-through on measuring the LTV of your mobile app user. It also provides some ways to reduce churn and increase profitability.
There is no doubt about the fact that more and more people are spending most of their online time on mobile apps. While this may mean more users on your app, it definitely doesn’t mean all your users will be profitable. As is true for most business models, 80% revenue comes from 20% users. Measuring the LTV of users can help app developers narrow down their best users and create offers and promotions to reward their loyalty to boost retention. Raja Manoharan, Dot Com Infoway
Once you understand the lifetime value of your customer, measure your churn rate, analyze the cost to acquire a customer, you will understand the investment you're making and the average return on that investment.
You can then make adjustments to any one or all of the variables. You may need to increase the cost of your service to maintain a healthy profit. You may need to invest more in customer service to retain your customers longer and increase revenues in app or long-term. You may need to work to reduce customer acquisition costs through organic and advocacy strategies. Or you may find that you can actually spend more money on paid acquisition strategies.