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Customer Life Time Value

Posted by Pooja Bagul on April 14, 2017

What more should I do to gain in more customers? How should I manage to strike a balance between my returns and expenses? Which marketing offers shall I invest in to create an outstanding product experience for my customers?

If you find yourself losing your sleep over these questions then it’s high time that you learn to utilize the penultimate solution of Customer Life Time Value to your advantage. Known to be a pivotal tool in e-commerce  businesses, Customer Life Time Value (LTV) is an expected revenue that can be acquired from a particular customer over his lifetime.

 – What is LTV?

LTV is a speculation of the net profit that a marketer would derive from his customer. Unlike other metrics used in marketing what makes Life Time Value more desirable is its ability to help a marketer to predict long term results.  Often many marketers commit the folly of focussing more on their product features rather than the requirements of their target audience. This is where the segmentation of  target audience comes into the picture. The primary motto of segmentation is to get in as much information as possible about your target audience.

When a marketer gets down to segmenting, it’s easy for him to get a hold of all those 20% customers who are responsible for nearly 80% of his business. Once a marketer gets this list, he can start calculating the LTV for these potential product loyal customers. Thus, the customers with maximum LTV are the ones who are responsible for your increasing profits.

 – What are the Benefits of LTV?

Known to be an excellent metric tool among marketers, let us count the ways in which LTV can be useful for us:

  1. Customer-centric: Being a customer-centric tool, unlike the traditional one-stop transaction, LTV helps a marketer to develop a lifetime relationship with his customers.
  2. Financial planner: Developing of a clear list of hot leads, helps a marketer to allocate his marketing budget accordingly.
  3. Dynamic model: The presence of LTV model makes it easy for a marketer to customize their product to fulfill the ever-changing requirements of their target audience.
  4. Performance-driven: Acting as an excellent ROI calculator, LTV lends in a financial and performance driven perspective to a marketer, making it easy for him to achieve his targets.
  5. Customer retention: LTV makes its easier for a marketer to retain his customers as often retaining your customer is easy as compared to pitching to a new customer.

 – How do you Calculate LTV?

LTV is calculated with the help of following formula:

(Avg Monthly Revenue per Customer * Gross Margin per Customer) ÷ Monthly Churn Rate (no. of brand switchers)

Apart from the above standard formula, the LTV calculation of an individual revolves around the type of purchase, frequency of purchase and amount that is spent by an individual during a particular period of time.

Like all other marketing metrics, LTV suffers from some limitations as well, however when a comparative analysis is undertaken, in terms of efficiency and giving results, LTV is certainly given higher preference by the marketers over the other metrics.

 

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